Bank of America believes the Bank of Japan will keep its policy rate at 0.5% during its meeting on July 30-31. They warn that the market’s hope for a rate hike in October may be too optimistic. Current market data shows a 25% chance of a rate hike in September and a 65% chance in October, but Bank of America thinks these estimates are too bold. Even with a US-Japan trade deal, the Bank of Japan is likely to stay cautious due to tariff risks and external demand issues.

Impact Of Dovish Surprise

There is a chance of a dovish surprise, which could weaken the yen if the Bank of Japan offers little reassurance about tightening. Ongoing political uncertainty in Japan adds risks for those bullish on the yen. Bank of America predicts the Bank of Japan will stay dovish and warns against betting on aggressive rate hikes, especially for October. This uncertainty could leave the yen vulnerable, potentially allowing the USD/JPY rate to rise if the Bank of Japan does not meet expectations. The Bank of Japan’s announcements are expected between 0230 and 0330 GMT. We anticipate that the Bank of Japan will keep its policy rate at 0.5% when it wraps up its meeting tonight. The market’s pricing for a rate hike by October seems too aggressive, reflecting a 65% chance. This could lead to a market adjustment if the central bank maintains its cautious stance. Recent data supports this outlook. Japan’s core inflation for June was 1.9%, still below the bank’s target. This, along with a slight GDP contraction in the first quarter, gives the Bank of Japan reason to wait. Therefore, we do not expect strong hawkish signals tonight.

Historical Precedent

A similar situation occurred in 2024 after the Bank of Japan ended its negative interest rate policy. The market anticipated quick rate hikes that never happened, which resulted in significant yen weakness that year. History shows that betting against the Bank of Japan’s cautious approach can lead to losses. For derivative traders, this suggests a bearish outlook for the yen in the coming weeks. Buying call options on USD/JPY may be a smart strategy to capitalize on expected gains. This approach would be advantageous if the yen weakens as predicted, while also limiting potential losses. The risk of a “dovish surprise” is high, potentially meaning that implied volatility on yen pairs is undervalued. If the Bank of Japan gives little backing for future tightening, the USD/JPY pair, currently around 158, could rise above 160. Traders might consider tactics that profit from both an increasing spot price and greater volatility. Create your live VT Markets account and start trading now.

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