Yen Gains as Markets Brace for Aggressive BoJ Rate Hike

Key Moments

USD/JPY Slips Ahead of BoJ Policy Decision

The USD/JPY pair edged lower during the Asian trading hours on Thursday, interrupting a three-session winning streak and trimming part of the prior day’s advance to a nearly two-week high. The pair was last seen trading around the 156.00 level as market attention turned to the upcoming Bank of Japan (BoJ) policy announcement on Friday.

The Japanese central bank has been widely anticipated to lift its benchmark interest rate by 25 basis points to 1.25% at the conclusion of its September meeting, which would mark a 31-year peak. In addition, market participants have been pricing in a stronger likelihood of another rate increase in December, reflecting concerns that elevated energy prices could fuel inflation further. This reassessment of the BoJ’s rate path has been lending support to the Japanese Yen (JPY) and restraining further upside in USD/JPY.

US Dollar Backed by Fed Outlook and Middle East Risk

On the US side, the Dollar extended its positive tone and touched a new high since late July, following the Federal Reserve’s latest policy decision on Wednesday. The Fed raised borrowing costs in what was described as the first rate hike in over three years, and its dot plot signaled the possibility of one additional increase later this year. Expectations that higher oil prices could stoke inflation have underpinned the case for further tightening, providing ongoing support for the greenback and for the USD/JPY pair.

Safe-haven demand has also been favoring the Dollar amid escalating tensions in the Middle East. Iran-backed Houthi rebels reported that Saudi aircraft had conducted more than 450 air strikes across Yemen over the past week and claimed responsibility for shooting down a Saudi F-15 fighter jet over Marib province. These developments have kept a geopolitical risk premium in place, reinforcing the bid for the US Dollar and helping to limit downside moves in USD/JPY.

Technical Picture: Key Levels on the 4-Hour Chart

From a technical perspective, USD/JPY has retained a cautious, near-term bearish tone while trading below a key resistance band at 156.60-156.65. This zone combines the 100-period Simple Moving Average (SMA) on the 4-hour chart with the 50.0% Fibonacci retracement level.

On the topside, additional resistance is seen at the 61.8% Fibonacci retracement at 157.55, followed by the 78.6% retracement near 158.81, ahead of the recent swing high at 160.42. The broader structure continues to suggest that rallies are vulnerable as long as the corrective phase from the cycle peak remains intact.

On the downside, initial support appears at the 38.2% retracement at 155.78, followed by the 23.6% level at 154.68. A more pronounced decline would bring focus to the structural floor around 152.91.