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USD/JPY is in positive territory on Monday. In the North American session, USD/JPY is trading at 128.50, up 0.52%.
The yen had an excellent week, climbing over 3% and trading at levels not seen since May 2022.
The Bank of Japan holds a two-day policy meeting on Tuesday and Wednesday in what could be one of the week's highlights. BOJ meetings were traditionally sleepy affairs that usually maintained the bank’s policy settings. That has changed, and the December meeting roiled the markets after the BoJ unexpectedly widened the band around 10-Year JBs to 0.50%, up from 0.25%.
The dramatic move has raised speculation that the BOJ could be planning additional policy changes at the upcoming meeting. The 0.25% cap on 10-year yields was breached on Friday and again today. The central bank has responded by buying over 2 trillion yen worth of JGBs, but there is talk that it could further widen the band to 0.75% or even abandon its yield curve control (YCC) policy completely. Since November, the yen has gained 14% against the US dollar, adding pressure on the BoJ to tighten its ultra-loose policy.
If the BOJ scraps the YCC, it would likely be viewed by the market as similar to a rate hike, pushing the yen higher. The BOJ will also release an updated inflation forecast, which is expected to be revised upwards. Market participants should be prepared for volatility from the yen after the BOJ announcements on Wednesday.
In the US, consumer confidence gained strength in December. UoM Consumer Sentiment jumped to 64.6, beating the forecast of 60.5 and above the November reading of 59.7. Inflation expectations for 2023 decreased to 4.0%, down from 4.4%, although long-term expectations inched higher.
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