USD/JPY skewed to upside on risk of dovish BoJ hike and hawkish Fed

The US dollar has been consolidating against most major currencies since Monday, with the USD/JPY pair remaining skewed to the upside as traders weigh the risk of a dovish rate hike from the Bank of Japan against a hawkish Federal Reserve.

The US Consumer Price Index report for May came in mostly in line with expectations on Wednesday, helping to alleviate some of the most hawkish fears. However, market pricing has not shifted significantly. Traders continue to price in 24 basis points of tightening by year-end, down only slightly from 25 bps seen before the CPI release. The data reinforces the view that the Fed is likely to drop its easing bias at the upcoming meeting, but the focus will be on the dot plot and forward guidance. Even though a rate hike is now fully priced in, if the Fed endorses the market pricing, it would effectively confirm that the bias has shifted to tightening.

For currency traders, the divergence in central bank policy expectations is a key driver. A hawkish Fed that signals further tightening would support the dollar, while a dovish BoJ hike—where the central bank raises rates but maintains an accommodative stance—could limit yen gains. This dynamic keeps USD/JPY skewed to the upside, as the interest rate differential favors the dollar. Traders can monitor real-time price movements on NowPrice's live FX dashboard to track the pair's reaction to upcoming data and central bank commentary.

Looking ahead, the focus will be on the Fed's June meeting next week, where the dot plot and Chair Powell's press conference will be critical. Any signal that the Fed is prepared to hike more aggressively could push USD/JPY higher, while a more cautious tone might trigger a pullback. Additionally, the BoJ's policy decision later this month will be closely watched for any shift in its yield curve control or forward guidance. Key data releases include US producer prices and retail sales, which could influence rate expectations.