US Dollar slips against the Japanese Yen before the Bank of Japan raises rates

The US Dollar experienced a decline against the Japanese Yen prior to the Bank of Japan's rate hike. At the session's high, the USD/JPY reached 156.32, while the low was 155.34, positioning the currency three Yen above the September 8 low and four below the September 2 high. The Bank of Japan announced a quarter-point increase in its policy rate to 1.25% on Friday at 02:45 GMT, with a 100% probability of this happening.

The Bank targets a specific inflation measure, but the actual consumer price index (excluding fresh food) is currently at 1.8%, matching July's figure. The Bank expects underlying inflation to surpass 2% later in the fiscal year due to factors like wage pass-through, oil prices, and a weakened currency. This decision came sooner than anticipated, as the Bank anticipated inflation to accelerate beyond 2% later in the fiscal year.

The USD/JPY price increased by a slight margin, at 0.268 percentage points, leaving behind a market somewhat expecting a larger move. Meanwhile, Japanese exports surged more than expected in August, driven by demand for artificial intelligence chips, which tend to show positive effects first when a stronger currency is in place.

However, the Yen intervention by the Ministry of Finance in the preceding weeks was essential in stabilizing the currency. The Ministry spent a record 15.4 trillion Yen to buy its currency, bringing it back from 164 to the middle of the 150s, but no further. The Federal Reserve's rate stands at 3.875%, creating a 2.875% difference from the Bank of Japan's 1%.

Over the next twelve months, the market predicts the Bank of Japan to increase its rate by 1.03 points, while the Federal Reserve's rate will rise by 0.72 points. This arithmetic explains why the USD/JPY pair recovered three Yen from its September low instead of surpassing it. The Ministry of Finance continued to purchase Yen, maintaining the need for action due to the persistent 4.60% interest rate forecast for the United States compared to Japan's 2.03%.

The October 29 meeting carries a 25% chance of further rate hikes, while December 17 has a 65% probability, indicating that the major currency movement will likely occur after the holidays. The Bank of Japan's statement is released at 03:00 GMT, with Governor Ueda answering questions at 06:30 GMT. The Federal Reserve Governor Bowman will deliver a speech at 07:30 GMT, and August industrial output figures will be published five hours later.

However, these events will only impact the pair if Tokyo initiates the movement first, as the American session serves as a footnote to the Japanese one. After Friday's American session, the market remains on hold until Tokyo opens on Thursday. During this period, there are no major economic releases from Japan to influence the Yen, making it a thin liquidity environment.

The Ministry of Finance's previous actions in buying Yen have proven to be the most effective strategy in maintaining the currency's stability. The USD/JPY pair is currently at 156.50, with resistance at 156.50 and support at 155.34, 155.00, 155.02, 154.00, and 152.89. The bias leans towards a lower value, with key levels to watch being 155.00 and 154.00.

The daily Stochastic Relative Strength Index (Stoch RSI) shows a value near 23, trending downwards after a brief upward movement, suggesting a potential shift towards a bearish trend. The daily closing price above 157.00 would signal the end of the downtrend.