Japanese Yen softens after Fed leaves rates on hold

• USD/JPY edges higher to around 163.50 in Thursday’s Asian session. 
• Fed voted 9–3 to leave its benchmark interest rate unchanged at a target range of 3.50% to 3.75% at its July meeting. 
• The BoJ is set to keep interest rates steady on Friday. 

The USD/JPY pair posts modest gains near 163.50 during the Asian trading hours on Thursday. The US Dollar (USD) strengthens against the Japanese Yen (JPY) on a hawkish hold from the US Federal Reserve (Fed). The Bank of Japan (BoJ) will announce its interest rate decision later on Friday, with no change in rates expected. 

As widely expected, the Fed held the interest rates steady at 3.50%–3.75% at its July policy meeting on Wednesday,  while hinting at a hawkish shift driven by persistent inflation and rising energy costs. The decision has three dissents voting for a rate increase, likely boosting odds of a September hike.

Fed Chairman Kevin Warsh said during the press conference that while the Fed won’t provide hints on where rate policy is heading, it will take necessary steps to meet its 2% inflation target.

Meanwhile, rising tensions in the Middle East could boost the Greenback against the JPY. The Guardian reported that the US military began launching strikes against Iran late Wednesday, retaliating against Iranian missile attacks on American forces in the region. Iranian media said the US military hit the south-western Iranian city of Abadan as well as Qeshm Island.

Traders await the BoJ interest rate decision later on Friday. The Japanese central bank is likely to keep rates steady at 1.0% at its July meeting but leave scope for further hikes with hawkish communication. 

“The BOJ is likely to maintain its view that risks to the price outlook are skewed to the upside,” said analysts at Mitsubishi UFJ Morgan Stanley Securities. “The timing could be pushed forward to September or October if the BOJ heightens alarm over an inflation overshoot or if relentless yen falls lead the administration to judge a rate hike is inevitable,” they said.

Yen risks build as BoJ hawkish hold could amplify tightening expectations

Scotiabank strategists caution that the balance of risks around the end of the week remains skewed toward further Yen strength, highlighting the policy backdrop as a key driver. They “see considerable risk into the end of the week, and note the potential for domestically-driven strength if BoJ policymakers deliver a hawkish hold and seek to build on the 25bpts of tightening (by December) currently priced into the short-term rates market,” underscoring how even a non‑move accompanied by firmer guidance could reinforce existing rate expectations and support JPY.

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