USD/JPY Plunges Ahead of Key Inflation Data and BoJ Decision

The Japanese yen has been on a tear in recent weeks, reaching its highest level since February this year. The USD/JPY pair has dropped to 154.17, down significantly from its year-to-date high of 163.96.

The upcoming events will be crucial in determining the currency's direction. The US is set to release the August consumer price index (CPI) data, which is expected to show a strong inflation report. Economists predict that the headline CPI rose by 3.4% last month, while the core CPI fell to 2.4%. Furthermore, gasoline and diesel prices have continued rising, with the average gasoline price in the US jumping to $4.27.

The market is anticipating a Bank of Japan (BoJ) interest rate hike next week, with economists unanimous in their prediction that the bank will decide to hike rates by 25 basis points. A BoJ rate hike would narrow the gap between interest rates in the US and Japan, potentially invalidating the carry trade opportunity.

However, there are risks involved. If the US hikes rates as well, the spread remains the same, and the yen rally could be reversed. Additionally, a 'less hawkish than feared' CPI print or dovish Fed tone should accelerate the trend toward 152 (50% fib).