The USD/JPY pair edged slightly higher during the Asian session on Monday (October 26), trading around the 157.00 level and remaining within the lower range seen since late September. Ahead of this week's key central bank events and data risks, bearish traders appear reluctant to place aggressive bets. Market attention is focused on Wednesday's Federal Reserve decision, Thursday's US third-quarter GDP and PCE price index data, and Friday's Bank of Japan policy update.
Event Calendar: Fed Decision, US Data, and BOJ Meeting Arrive in Quick Succession
This week features a dense lineup of macroeconomic events. The Federal Reserve will conclude its two-day policy meeting on Wednesday and announce its rate decision, with market focus centered on the accompanying policy statement and the tone and forward guidance from Chair Kevin Warsh's post-meeting press conference. Closely following on Thursday, the preliminary reading of US third-quarter GDP and the PCE price index will be released, both of which will directly influence market expectations for the Fed's future policy path and could serve as important catalysts for dollar movement. On Friday, attention shifts to the Bank of Japan's policy update, whose decision and communication are expected to further dominate the short-term direction of USD/JPY, creating a dense interweaving of transatlantic and Asia-Pacific policy signals.
Policy Divergence: No Urgency for Fed Rate Hikes, BOJ Governor Signals Hawkish Stance
Recent comments from Federal Reserve officials indicate there is no immediate urgency to raise rates at the upcoming meeting. Meanwhile, US Treasury yields have retreated from multi-year highs, weakening the momentum behind the dollar's rebound after touching a three-week low last Thursday. In contrast, the yen has found support from more hawkish remarks by Bank of Japan Governor Kazuo Ueda last week, who noted that underlying inflation is approaching the 2% target, reinforcing the case for a near-term rate hike. This divergence in policy stances could continue to exert downward pressure on USD/JPY. However, geopolitical uncertainty persists and may limit deeper losses for the safe-haven dollar, keeping the pair in a tug-of-war between policy expectations and risk premiums.
Geopolitics and Pricing: Middle East Risk Premium Remains, December Fed Rate Hike Odds Around 80%
On the Middle East front, US President Donald Trump has ruled out immediate military action against Iran, but risks have not dissipated. Yemen's Iran-backed Houthi rebels threatened on Sunday to continue attacking Saudi Arabia's King Khalid International Airport in Riyadh, and with US-Iran talks stalled, the geopolitical risk premium remains firmly in place. Meanwhile, traders are still pricing in roughly an 80% probability of another Federal Reserve rate hike in December. This high-probability pricing helps restrain excessive bearish bets on the dollar, thereby limiting the downside for USD/JPY. Before further positioning for shorts, the market needs to remain cautious about the dual uncertainties of geopolitics and policy expectations.
Institutional Views
Goldman Sachs strategist Karen Reichgott Fishman has sharply lowered the 12-month USD/JPY target from 165 to 150, while adjusting the 3-month and 6-month targets to 158 and 155, respectively. The bank believes that the Bank of Japan's accelerated pace of rate hikes, along with the growing likelihood of domestic capital returning to Japanese assets, is driving a structural strengthening of the yen. The domestic policy environment that long suppressed the yen is shifting, and undervaluation factors are beginning to take effect. Although Japanese investors are still heavily purchasing overseas assets, testing the pace of repatriation, Goldman Sachs maintains a bullish yen stance, believing that changes in policy and capital flows will gradually support yen appreciation. Westpac expects USD/JPY to fall to 156 by December 2026 and further decline to 151 by December 2027. The bank notes that Japan's inflation data continues to test the need for further rate hikes, while expectations that US rates will remain unchanged throughout 2027 mean that yen strength does not depend on rapid Fed rate cuts. Westpac views this as a path of gradual yen recovery, echoing Goldman Sachs' 12-month target of 150. Although short-term volatility remains influenced by policy meetings and risk sentiment, the bank remains bullish on the yen's medium-to-long-term appreciation against the dollar.
Summary
This week is packed with events: Wednesday's Fed decision and Warsh's remarks, Thursday's US third-quarter GDP and PCE price index, and Friday's BOJ policy update. Policy divergence forms the core logic — Fed officials suggest no urgency to hike rates, falling US Treasury yields from multi-year highs weigh on the dollar, while Ueda's hawkish comments strengthen the case for an imminent BOJ rate hike, creating headwinds for USD/JPY. However, the Middle East geopolitical risk premium persists, and the market prices roughly an 80% probability of a December Fed rate hike, limiting deeper declines in the pair. Short-term direction hinges on the relative signals from this week's central bank events and data. (USD/JPY daily chart, source: Yihui Tong) As of 13:49 Beijing time, USD/JPY was quoted at 157.08/09.
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