The yen opened weak Friday, slipping 0.1% to 156.19 per dollar and 0.2% against the euro at 179.30. This marks a resumption of declines after a brief three-day pause on Thursday. The softness is largely driven by fresh data showing Japanese inflation in August fell slightly below market expectations, dampening some of the urgency around the central bank's next move.
Despite the weaker currency, the setup for the Bank of Japan's decision is stark: a hike to the highest level in over three decades is now the consensus. LSEG swap pricing puts the probability of this move at 83%, with the market already assuming quarterly hikes will follow. Chris Weston, head of research at Pepperstone Group, noted that because the move is so heavily priced in, the decision itself might not shock the market.
"Given the degree of pricing, the rate decision itself may have limited impact on the yen," Weston said. "Instead, attention should fall on the forward swaps curve and the bank’s guidance around the pace and urgency of further tightening." The real catalyst, he argued, will be Governor Ueda’s press conference, where traders will hunt for signals on whether the BOJ sees a need to act faster or if it will maintain a measured, gradual normalization path.
The broader FX tape is muted. The British pound sat flat at a 2.5-month low of $1.3359 following the Bank of England’s rate hold and unexpected pause in bond sales. The US dollar index held steady at 100.2100, edging back from a recent high. Meanwhile, the Australian dollar gained 0.1% to $0.7117 after RBA Governor Michele Bullock warned lawmakers that inflation risks are beginning to materialize.
In the US, the narrative is shifting toward a potential rate hike rather than a cut. Fed funds futures now show a 53% implied probability of a 25-basis-point increase at the next Fed meeting, up sharply from 27.2% a week ago. This pivot reflects growing confidence in Chair Kevin Warsh’s efforts to insulate the Federal Reserve from White House influence.
Risk assets are mixed. Brent crude dipped 1% to $103.76 as traders reassess supply risks following military strikes between Saudi Arabia and Yemen’s Houthis. China has reportedly asked Tehran to help restrain the group. In crypto, Bitcoin slid 0.1% to $76,442.97, while Ether fell 0.2% to $2,447.39.