USD/JPY Eyes Rate Hike Decision as Rally Hits Multi-Decade Highs

The USD/JPY currency pair has reached fresh multi-decade highs following a bullish breakout last week, but its rally may be put to the test this week with several key events on the horizon. The Federal Reserve's interest rate decision on Wednesday is the most significant event for USD/JPY this week, with overnight index swaps implying a one-in-three chance of a 25bp rate hike.

The Fed's Communication Challenge has been flagged as a major concern, and economists are forecasting a steady benchmark Federal Funds Rate. However, the market had initially expected a snooze fest just weeks ago.

Lloyds Bank notes that the Euro to Dollar (EUR/USD) exchange rate fell in four of the five sessions last week, finishing just above July's low at 1.1362, leaving the Euro on the defensive heading into the new week.