USD/JPY remains sensitive to monetary policy divergence this month, as bets for a December 10 Fed rate cut and a December 19 BOJ hike gain traction, supporting Tokyo’s effort to stabilize the Japanese Yen (JPY). Markets await Trump’s Fed Chair announcement, with Kevin Hassett seen as a credible, Senate-confirmable candidate, potentially shifting expectations away from Jerome Powell, DBS' Senior FX Strategist Philip Wee notes.

BOJ eyes inflation as JPY weakness sparks market attention

"Despite volatility driven by higher JGB yields, USD/JPY should keep its sights set on monetary policy divergence this month. The firming of previously half-hearted bets for a Fed cut on December 10 and a Bank of Japan hike on December 19 should provide more credibility to Tokyo’s intentions to stabilize the JPY. BOJ Governor Kazuo Ueda has become less worried about the impact of tariffs and is paying more attention to how the weak JPY could boost inflation."

"US President Donald Trump indicated that he has made up his mind on the next Fed Chair. Markets believe that Kevin Hassett stands out as the only candidate who is confirmable in the Senate and credible enough to avoid destabilizing concerns about the Fed’s independence. Although Hassett has been closely involved with Trump’s economic advisers, he is considered market-friendly compared with more ideological contenders."

"US Treasury Secretary Scott Bessent indicated that Trump may announce his Fed Chair pick before Christmas, potentially shifting policy expectations away from Fed Chair Jerome Powell toward the shadow Fed Chair."