USD/JPY renews yearly low below 140.00 in week full of monetary policy

• USD/JPY slips sharply to near 139.50 with all eyes on Fed policy.
• Market expectations for big Fed rate cuts have strengthened.
• The BoJ is expected to leave interest rates at 0.25% on Friday.

USD/JPY hit a new yearly low at 139.50 in the North American session on Monday. The asset is weakening ahead of monetary policy decisions by the Federal Reserve (Fed) and the Bank of Japan (BoJ), which will be announced on Wednesday and Friday, respectively.

Market sentiment remains upbeat as the Fed is almost certain to move to policy normalization on Wednesday. This would be the Fed’s first interest rate cut in more than four years since it announced a fight against rising inflation due to pandemic stimulus.

Meanwhile, the debate over the likelihood of a Fed rate cut has taken a turn. Market expectations for the Fed to cut interest rates by a wide margin, which were markedly lower last week ahead of the release of the United States (US) Producer Price Index (PPI), have strengthened. The CME FedWatch tool shows that the probability that the Fed will cut interest rates by 50 basis points (bps) rose to 65% from 30% a week ago.

The US PPI report showed annual producer inflation fell at a faster-than-expected pace to 1.7%, the lowest in six months.

Apart from the interest rate decision, investors will also focus on the Fed’s dot chart, which will show interest rate projections for various time frames by all officials. The CME FedWatch tool also shows that the central bank will cut interest rates by at least 100 bps this year.

In the Tokyo region, investors see the BoJ holding interest rates steady but maintaining hawkish guidance on supporting inflationary pressures and the growth outlook. The BoJ pushed its interest rates to 0.25%. Analysts at Standard Chartered see BoJ interest rates rising to 0.5% by the end of the year. Market experts’ confidence has been boosted by inflation that has remained above 2% for the past 21 months.