The more hawkish rhetoric put out by BOJ governor, Kazuo Ueda, helped to give the Japanese yen a bit of a lift to start the week/month. The pair briefly fell below the 155.00 level overnight before buyers stepped in to keep a daily close above the figure level. Before yesterday, market players seem convinced that the BOJ would not hike rates again in December. But following Ueda's remarks, there is now a wildcard possibility of a rate hike being on the table later this month.
The market odds are showing ~35% probability of a rate hike priced in currently. So, we're definitely caught somewhere in between having been sure that the BOJ won't move in December to now coming around to the idea that they possibly might. That will keep the yen in a more interesting spot over the next few weeks as traders look to decipher what the BOJ might end up doing.
As for USD/JPY currently, sellers continue to hold near-term control at the very least. Price action continues to rest below the key hourly moving averages, reaffirming a more bearish near-term bias. However, the failure to secure a daily close below 155.00 means that buyers are still very much in the game.
The debate is basically now about striking a balance between the next BOJ rate hike and the government's fiscal plans, with Takaichi unleashing big stimulus as being the fiscal dove she is.
I would argue that the central bank might not have much left in the tank apart from one more rate hike, be it in December or just before March next year. In other words, there might be just one more hawkish repricing at best before traders settle into the idea that there will not be any more rate hikes in 2026 after.
In that lieu, downside risks to USD/JPY might be more capped so long as the dollar side of the equation holds. The Fed outlook is going to be key in that regard but all else being equal, I would argue that USD/JPY looks more poised for a test of 160.00 again next rather than a push back towards 150.00 going into the year ahead.
For the time being though, sellers will at least have something to work with before we get to the BOJ policy decision on 19 December. So, expect BOJ communication in the coming two weeks to be a key driver of trading sentiment in the run up to the main event.
