Commerzbank’s Volkmar Baur says USD/JPY traders are focused on the upcoming Bank of Japan (BoJ) meeting, where a rate hike is seen as very unlikely and largely priced out versus three weeks ago. He expects a clear signal pointing to a June hike if the Iran conflict eases, warning that absent such guidance, markets could test the 160 level in USD/JPY.

BoJ guidance and 160 risk for Yen

"When the Bank of Japan meets for its monetary policy meeting very early tomorrow morning Central European Time, the foreign exchange markets will be watching the decision closely. An interest rate hike now seems quite unlikely. The market is currently pricing in such a move with only about a 7% probability."

"Most recently, the Bank of Japan released several research papers in which it argued that the neutral interest rate has not yet been reached and that inflation is slowly settling at 2%. The research department was thus essentially paving the way for a rate hike."

"The focus is therefore once again on the outlook. We - and presumably the market as well (which is pricing in a June hike with at least a 65% probability) - expect a fairly clear indication that a June hike is likely, at least if the Iran conflict subsides by then."

"Should such a signal fail to materialize, it is quite conceivable that even the Ministry of Finance’s warnings against intervention will no longer be of much help, and the market will test the 160 mark in USD-JPY."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)