BOJ Rate Hike Odds Rise as USD/JPY Range-Bound

Unseasonably mild U.S. inflation data released this week has significantly reduced the probability of Federal Reserve rate hikes in October, leaving the USD/JPY exchange rate range-bound.

The U.S. core Personal Consumption Expenditures (PCE) price index rose by 3.0% year-on-year in August, below market expectations, causing traders to rapidly reduce their bets on a Fed rate hike in October. The probability dropped to approximately 35%.

Following the data release, the USD/JPY pair briefly fell below 156.50, hitting a one-week low, but failed to extend its gains and instead reverted to near the 157.00 level at the close. This marked the fourth consecutive trading day settling above this integer threshold.

The short-term trajectory of the yen reflects the policy divergence between two major central banks: the Bank of Japan (BOJ), which raised its policy rate by 25 basis points to 1.25% on September 18, and the Federal Reserve, whose target range remains at 3.75%-4.00%. The resulting policy interest rate differential is at least 2.5 percentage points.

The upcoming data calendar will directly test these expectations, with key releases including the Bank of Japan's Quarterly Tankan Survey and the U.S. Non-Farm Payrolls report in September. A surge in Tokyo's inflation data or strong U.S. employment numbers could significantly impact the exchange rate.