Yen weak ahead of BOJ decision; rate hike expected

The Japanese yen opened weaker against the dollar and euro on Friday Asian trading as currency markets remained subdued prior to the Bank of Japan's anticipated interest rate increase later in the session. The yen depreciated 0.1% to 156.19 per dollar, continuing its decline following a three-day downward trend on Thursday. Traders anticipate the Bank of Japan raising interest rates to the highest level in over three decades.

The yen's weakness followed Japanese inflation data released on Friday, which showed inflation falling slightly short of expectations in August. Market expectations indicate an 83% probability of a Bank of Japan rate hike, with potential follow-up quarterly hikes, according to LSEG swap pricing data. Analysts suggest the Bank of Japan's decision may have limited impact on the yen, urging traders to focus on the forward swaps curve and the central bank's guidance on the pace and urgency of further tightening.

Governor Ueda's press conference will be crucial, as market participants will be seeking confirmation of continued normalization and assessing the urgency of any additional rate hikes. Meanwhile, the British pound remained flat at a 2.5-month low against the dollar after the Bank of England maintained interest rates and unexpectedly paused bond sales for six months.

The euro also held steady at $1.1478. The Australian dollar strengthened marginally at $0.7117 as the Reserve Bank of Australia's Governor warned lawmakers that inflation risks were materializing. The US dollar index, tracking the greenback's strength against a basket of currencies, remained steady at 100.2100, after dipping from a 2.5-month high on Thursday.

Traders expect a Federal Reserve rate hike next month, with a 53% probability of a quarter-point increase at the upcoming meeting, up from 27.2% a week prior according to FedWatch tool data. Oil prices opened lower, with Brent crude futures falling 1% to $103.76 per barrel as traders re-evaluated supply risks following strikes by Saudi Arabia and Iran-backed Houthis.

In cryptocurrencies, Bitcoin experienced a slight decline of 0.1% to $76,442.97, while Ether dropped 0.2% to $2,447.39.