USD/JPY consolidates post-Fed gains north of 114.00 level as Friday’s BoJ meeting looms

• USD/JPY is consolidating just above 114.00 ahead of Friday’s BoJ policy decision, which is not expected to yield any surprises.
• Market focus is current elsewhere in G10 FX markets on Thursday, given the bonanza of European banks announcing policy.

After Wednesday’s post-Fed policy announcement excitement that saw USD/JPY break out to fresh month-to-date highs above the 114.00 level, conditions have become more subdued for the pair as focus in FX markets switches to other currencies. The Bank of England just surprised markets with a 15bps rate hike, while the ECB held rates and confirmed the end of the PEPP, though will temporarily increased APP purchases in Q2 and Q3 2022 to prevent a cliff-edge drop off in bond purchases in 2022. Euro traders now await remarks from ECB President Christine Lagarde from 1330GMT and, as a result of all the central bank activity in Europe (the SNB and Norges Bank also issued policy decisions on Thursday), there hasn’t been much focus on USD/JPY.

At present, USD/JPY is moving sideways just below Wednesday’s highs in the 114.10s. There is likely to be a degree of caution in the pair ahead of Friday’s BoJ monetary policy decision, though the bank isn't expected to deliver any surprises (as usual). As far as USD/JPY traders will be concerned, the big risk events are already over now for 2021. Traders will need to weigh up whether the “Santa rally” in global equity market can continue into the year-end, which might pressure safe-haven JPY and put upwards pressure on USD/JPY.

The rapid spread of Omicron across much of the world is a risk that could underpin some yen demand, especially if it keeps longer-term US government bond yields at suppressed levels. Indeed, while USD/JPY has cleared the most important technical barrier preventing a recovery back towards November highs at 115.50 in the form of the previous December highs just under 114.00, US yields will need to recover back to their pre-Omicron levels if USD/JPY is to do the same. US bond markets appear to doubt the Fed’s bullish take on the outlook for US economic growth in 2022 and beyond, otherwise, the 10-year would have been able to push back above 1.50%.