USD/JPY retreats from 156.40 as BoJ’s Ueda reiterates interest rate hike plans

The USD/JPY pair gives up some of its intraday gains after posting an intraday high around 156.40 during the European trading session on Tuesday. Still, the pair is 0.12% higher at around 156.10.

The pair faces slight selling pressure as the Japanese Yen (JPY) attracts bids after comments from Bank of Japan (BoJ) Governor Kazuo Ueda signal that the central bank will stick to its policy normalization path, adding that inflationary pressure continues to accelerate.

“Because we are foreseeing convergence to 2% of the underlying component, we’ve been adjusting the degree of easing slowly,” Ueda said.

On Monday, investors turned slightly cautious over BoJ’s interest rate hike plans, following the release of the weaker-than-projected Japan Q3 Gross Domestic Product (GDP) data. Revised figures showed that the Japanese economy contracted at a faster pace of 0.6% against the preliminary estimate of 0.4%, a scenario that strengthens the case of Prime Minister Sanae Takaichi’s large fiscal spending plans, and undermines the scope of further monetary policy tightening.

Meanwhile, a massive 7.6-magnitude earthquake in northeastern Japan on Monday also put pressure on the Japanese Yen. The government has ordered households in the region to evacuate the city, while Japan’s Meteorological Agency (JMA) has also issued Tsunami warnings.

On the US Dollar (USD) front, investors await the Federal Reserve’s (Fed) monetary policy announcement on Wednesday. The major highlight of the Fed’s policy will be the Economic Projections report, as the central bank is widely anticipated to cut interest rates by 25 basis points (bps) to 3.50%-3.75%. The Fed is expected to attempt a delicate balancing act as the labor demand remains weak and price pressures have remained well above the 2% target for a longer period.

Economic Indicator

Fed Interest Rate Decision

The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).