Yen Slips Ahead of BOJ Decision as Markets Price In Rate Hike

The yen opened Asian trading on a soft note against the dollar and the euro on Friday, with currency markets subdued as traders positioned for an expected rate increase from the Bank of Japan later in the session.

The Japanese currency slipped 0.1% to 156.19 per dollar, resuming its decline after halting a three-day losing run on Thursday. Against the euro, it was 0.2% weaker at 179.3000. The move followed Japanese inflation data for August that came in slightly below expectations.

Swaps pricing puts the odds of a BOJ hike at 83%, with quarterly increases anticipated thereafter. The decision is due between 0300 and 0500 GMT, and Governor Kazuo Ueda is scheduled to brief the media at 0630 GMT.

Analysts said the rate decision itself may prove less consequential than the guidance that accompanies it. "Given the degree of pricing, the rate decision itself may have limited impact on the yen," said Chris Weston, head of research at Pepperstone Group in Melbourne. "Instead, attention should fall on the forward swaps curve and the bank's guidance around the pace and urgency of further tightening." Weston added that Ueda's press conference would be key, with the market watching for confirmation that further normalisation remains on the table.

Elsewhere, sterling held flat at a 2-1/2-month low of $1.3359 after the Bank of England left interest rates unchanged on Thursday and unexpectedly paused government bond sales for six months. The euro was steady at $1.1478.

The Australian dollar firmed 0.1% to $0.7117 after Reserve Bank of Australia Governor Michele Bullock told lawmakers that inflation risks flagged by policymakers appeared to be materialising. The New Zealand dollar eased 0.1% to $0.5724.

The US dollar index, which tracks the greenback against six major currencies, was flat at 100.2100, having pulled back from a 2-1/2-month high on Thursday. Fed funds futures now assign a 53% probability to a quarter-point hike at the Federal Reserve's two-day meeting next month, up from 27.2% a week earlier, as investors grow more confident in Chair Kevin Warsh's efforts to assert the central bank's independence from the White House.

Oil prices opened lower, with Brent crude futures down 1% at $103.76 a barrel as traders reassessed supply risks after Saudi Arabia and Yemen's Iran-backed Houthis exchanged strikes on Thursday. China has asked Tehran to help rein in the Houthis following their military blitz over the past week, according to three Iranian sources familiar with the matter.

In cryptocurrencies, bitcoin eased 0.1% to $76,442.97, while ether was down 0.2% at $2,447.39.