By the European session, USD/JPY had gained 0.35% and is trading around 157.36. The dollar index DXY (a measure of the dollar's strength against a basket of six currencies) rose 0.12% to 101.87. GBP/USD fell to session lows, roughly 0.5% below last week's peak of 1.3419, which was a five-week high.
The reason for the move is simple and technical: investors are cutting short positions on the dollar ahead of the Fed decision. The two-day meeting starts on Tuesday, with the outcome announced on Wednesday. According to CME FedWatch, the rate will almost certainly be left in the 3.75-4.00% range: regulators want to assess the effect of the September hike before moving further.
The yen is under pressure from a different story. The Bank of Japan on Friday, October 30, is expected by consensus to keep the rate at 1.25% after a 25-basis-point hike in September. The regulator's head, Kazuo Ueda, warned in September that rapid hikes could unsettle asset prices and that confirming entrenched inflation would take time. The interest rate swap market is pricing in about a 75% probability of a hike to 1.50% as early as the December 18 meeting.
For the pound, the picture is the opposite: the Bank of England meets next week, and the market has almost fully priced in a 25-basis-point hike - after GDP growth came in above expectations and September inflation exceeded forecasts. Futures put the probability of the Fed raising rates by at least a quarter point in December at 80%.
Later in the week: preliminary US third-quarter GDP and the PCE price index (the Fed's favorite inflation gauge) on Thursday, plus reports from Amazon, Alphabet and Microsoft.
Did you hold a short on the dollar over the weekend?
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