Dollar Strengthens Ahead of Fed Rate Decision

The USD/JPY pair is experiencing a recovery from its seven-month low as the US dollar gains strength ahead of the Federal Reserve rate decision and the Bank of Japan meeting later this week.

The dollar's rise is largely attributed to the increasing conviction among market participants that the Fed will hike rates on Wednesday, with the CME FedWatch pricing in a 92% probability of a 25-basis-point rate hike, taking rates to 3.75%-4%. This is up from 85% yesterday.

The yen has pulled back as markets look ahead to the BOJ rate decision on Friday, where the central bank is expected to raise rates by 25 basis points. The key focus will be on how strongly it signals further tightening.