The AUD/JPY pair has dropped slightly, reaching around 102.70 in the early European session on Thursday. Despite this decline, it remains above the 100-day EMA of 99.44, showing an overall upward trend while the RSI is steady at 54.91. The Bank of Japan is expected to raise interest rates from 0.5% to 0.75% in their upcoming meeting, marking the first increase since January. This change would bring rates to a three-decade high, with potential for future hikes based on economic reactions.

Technical Analysis

Technically, the AUD/JPY is just above the middle Bollinger band at 102.61, suggesting it may keep moving upward. The resistance level for an upward trend is at 104.43, while support is seen at 100.78. Any significant breakout will require more volatility due to the slow expansion of the bands. Gold is experiencing slight declines but continues to receive support from a stronger US Dollar. Meanwhile, the GBP/USD pair remains stable as traders prepare for important central bank events, including the Bank of England’s policy decision. Different markets are anticipating the US CPI report, which may impact currency movements and investor sentiment. With the AUD/JPY pair drifting down toward 102.70, we approach a crucial moment ahead of the Bank of Japan’s decision tomorrow. The market is anticipating a rate hike to 0.75%, which is strengthening the Japanese Yen. This would represent the highest benchmark rate in Japan since the late 1990s. The reasoning for the rate hike is backed by strong domestic data this year. Japan’s core inflation has consistently stayed above the Bank of Japan’s 2% target for over eighteen months, recently reported at 2.7% year-over-year. Additionally, significant wage increases from the spring “Shunto” negotiations, averaging over 5%, are beginning to affect the economy, providing the central bank with justification to act.

Impact on Currency Pair

On the flip side, the Australian dollar is facing challenges. The Reserve Bank of Australia has kept rates unchanged for the last two meetings as inflation has cooled to 3.4%, easing the pressure for further tightening. Weak industrial profit data from China, Australia’s largest trading partner, also lowers the AUD’s near-term outlook. Given the high likelihood of a BoJ rate hike, traders should consider positions that benefit from a stronger yen, which would lower the AUD/JPY pair. Purchasing put options with a strike price near 101.00 could provide a profitable opportunity for a confirmed downward move, offering defined risk if the market has already accounted for the BoJ’s action. However, we must also consider a potential “sell the news” reaction, where the yen may weaken if the BoJ’s guidance is less aggressive than expected. A volatility play, such as a long straddle, may be suitable for traders anticipating a sharp movement in either direction but uncertain of the outcome. This involves buying both a call and a put option with the same strike price and expiration. We should recall the market reaction to the BoJ’s historic policy shift in March 2024, when negative interest rates were ended. Following that announcement, the yen initially weakened since the move was largely expected and carried cautious commentary. A similar response may occur if tomorrow’s hike is accompanied by signals that future actions will be gradual and data-driven. Thus, key technical levels to monitor include the lower Bollinger band at 100.78, which could serve as a target for bearish positions. A drop below the 100-day EMA at 99.44 would confirm a notable trend shift. Conversely, if the BoJ disappoints rate hike supporters, a rise toward the upper barrier at 104.43 would negate the immediate bearish outlook. Create your live VT Markets account and start trading now.

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