Anticipation of a Bank of Japan (BOJ) rate hike is setting the stage for a stronger yen, as market sentiment increasingly favors yen appreciation. Traders have ramped up their short positions on the yen, reflecting expectations of a rate increase, which now stands at over 70% probability. This shift is exerting downward pressure on dollar longs, as the market braces for potential yen strength. Rising wages in Japan are adding to inflationary pressures, further supporting the likelihood of higher interest rates, which could bolster the yen's value.
The USD/JPY exchange rate is poised for a potential decline, with traders closely monitoring Japanese media for confirmation of a rate hike. Such reports could trigger a significant yen rally, pushing the USD/JPY toward its first daily close below 156 since mid-December. As of 19:20 on January 15, the DXY Index, which measures the dollar against a basket of currencies, is trading at 109.08, slightly below its last close of 109.09.