USD/JPY delivers sheer volatility ahead of revision of BoJ’s inflation forecasts

• USD/JPY delivered a volatile spike as BoJ set to raise inflation forecasts for the fiscal year of 2023 and 2024.
• The market mood is risk-averse due to deepening Middle East tensions.
• Fed Daly suggested that the recent surge in long-term bond yields is equivalent to one 25 bps interest rate hike.

The USD/JPY pair cracked to near 148.80 but recovered quickly to its broader trading range around 149.50 as the Bank of Japan (BoJ) is expected to announce inflation forecasts for the fiscal year of 2023 and 2024 sooner.

Bloomberg reported on Tuesday that BoJ’s new Core CPI forecast for the fiscal year 2023 is likely to approach 3%, up from 2.5% as of July, and be set at 2% or more in sight for the fiscal year 2024. A higher inflation forecast indicates that the BoJ is confident about an increase in wages, which would drive inflation higher.

The hopes of an intervention from the Japanese authority into the FX domain are diminishing. Japanese authorities are worried about further sell-off in the Japanese Yen and are holding volatile moves responsible for them. Historically, volatility spikes remain for days for a few weeks but the appeal for the Japanese Yen is weak from some quarters due to the adaptation of easy monetary policy by the BoJ. Therefore the authorities cannot reverse the tide against weak appeal for the Japanese Yen backed by expansionary monetary policy.

Meanwhile, S&P500 futures have posted significant losses in the European session, portraying a risk-off market mood due to deepening Middle East tensions. The US Dollar Index (DXY) retreated from 106.50 as Federal Reserve (Fed) policymakers supported keeping interest rates unchanged in November.

San Francisco Fed Bank President Mary Daly suggested that the recent surge in long-term bond yields is equivalent to one 25 basis points (bps) interest rate hike. The risk of lifting interest rates further could push the economy into a recession.