The dollar is mixed across the board on Monday as the week begins with trading subdued due to the U.S. holiday and a dominant cautious mood. The yen is a tad firmer as investors square positions ahead of the Bank of Japan policy announcement.
Meanwhile, the pound remains on the back foot, having fallen to a fresh 2-month low of 1.5830 versus the greenback. The shared currency, however, has held pretty steady above the 1.3300 mark in the absence of news from the eurozone finance ministers' meeting.
"In U.S. political developments, House Republicans are considering voting to raise the U.S debt ceiling for the equivalent of around three months. Should that extension be agreed to, it could allow for the current period of relative market calm to extend somewhat longer," says a Wells Fargo analyst. "Although FX trading remains somewhat uneven and the Bank of Japan meeting offers significant event risk, our overall bias for this week is for gains in most commodity and emerging currencies."
USD/JPY holds positive bias, but short-term correction likely
The dollar holds its positive bias versus the yen ahead of the BoJ decision, despite recent rejection from 90.24 (fresh 2 ½-year high), which sent the pair to a low of 89.33 during the Asian session. A break above the 90.25 area could take USD/JPY toward its next bullish target of 92.50 ahead of 93.00. However, bearish corrections cannot be ruled out, with the 88.00 area as major support, given that growing expectations of an aggressive BoJ move risk a slide post decision.
The Bank of Japan is widely expected to double the inflation target to 2% from 1%, and is also expected to raise its asset purchase target. "Given expectations of aggressive action at the meeting, the risk is tilted towards mild disappointment, perhaps explaining some of the yen strength," says Nick Bennenbroek, Head of Currency Strategy at Wells Fargo Bank.
In this regard, the TD Securities team shares the view that there is a good deal of room for disappointment, as some are even expecting that the Bank of Japan could make unlimited asset purchases until the inflation target is reached. "Consensus opinion is less severe, but with such ideas circling, there is clearly a very high bar set," says TD Securities. "That leaves a good deal of room for disappointment, a move that would not be surprising to us after the impressive JPY slide over the past four months."