AUD/JPY climbs closer to 97.90, buoyed by prospect of RBA considering rate hikes

• AUD/JPY continues to move in a positive direction as RBA hinted at increasing policy rates.
• RBA Governor Michelle Bullock anticipates that inflation will not return to its target until 2026.
• Japanese Yen faces challenges on reduced expectations for an early interest rate hike by BoJ.

AUD/JPY extends its upward trajectory for the third consecutive session, reaching around 97.90 during European trading hours on Thursday. The AUD/JPY cross receives upward momentum as the Reserve Bank of Australia (RBA) continues to hint at the possibility of further rate hikes.

RBA Governor Michelle Bullock recently emphasized that inflation in Australia is primarily "homegrown" and "demand-driven," fueled by the robust labor market and increasing wage inflation. The RBA does not foresee inflation returning to its target until 2026.

However, the decline in the S&P/ASX 200 Index, driven by losses in financial-linked shares despite gains in iron ore miners, may have exerted downward pressure on the Australian Dollar. Consequently, this has limited the advance of the AUD/JPY cross.

On the other side, the Japanese Yen (JPY) encounters hurdles amid reduced expectations for an early interest rate hike by the Bank of Japan (BoJ). Additionally, the prevailing risk-on sentiment diminishes demand for the safe-haven JPY, thereby acting as a tailwind for the AUD/JPY pair.

However, Japanese media outlets have indicated that more BoJ policymakers are supporting the notion of a policy shift at the upcoming policy meeting, as significant pay hikes by major companies bring the 2% price stability target within reach. The higher-than-expected producer inflation data from Japan reinforces the belief that the BoJ could initiate rate hikes soon.

On Wednesday, Japan's spring wage negotiations revealed that firms have yielded to the demands of the country's largest trade union confederation, Rengo, agreeing to pay increases of 5.85% this year, surpassing 5.0% for the first time in 30 years. Furthermore, Japan's largest industrial union, UA Zensen, reported on Thursday that the average pay rise offered by 231 service-sector firms has reached the highest level on record since 2013.