USD/JPY Consolidation Ahead of Fed and BoJ Decisions

The USD/JPY currency pair has been consolidating around its four-decade high due to conflicting market expectations ahead of crucial decisions from the Federal Reserve (Fed) and Bank of Japan (BoJ).

Last week, the US dollar opened lower after the US halted strikes in Iran, but instead of eroding losses, it printed a new weekly high. The greenback's strength hasn't come from Treasury yields or economic data, suggesting that it might be due to hedging activity ahead of the Fed's decision tomorrow.

The Fed is expected to hold interest rates steady, but there may be dissenting voices calling for a rate hike. Forward guidance will likely remain limited under Chair Powell, and recent comments from policymakers suggest that inflation increases will dictate the pace of tightening.

In contrast, the BoJ is expected to keep interest rates unchanged on Friday while upgrading growth forecasts and potentially near-term inflation outlook. The focus will be on forward guidance after a report suggested some BoJ officials view the weaker JPY as adding upside inflation risks, prompting traders to bring forward rate hike expectations.