Oil above $100 is adding fresh pressure to policymakers, while traders prepare for decisions that could quickly reshape currency markets.

The dollar remained steady, while the Japanese yen held near a seven-month high ahead of meetings by the U.S. Federal Reserve and the Bank of Japan. Market participants are assessing the prospects of further rate hikes and possible changes to monetary policy.

As informed by Reuters

Oil prices, which have risen above $100 a barrel, are adding to inflationary pressure and complicating central banks’ decisions. At the same time, concerns about fresh sell-offs in long-term bonds are influencing currency movements and government bond yields.

The European Central Bank raised interest rates last week and left the door open to further policy tightening. Markets are now awaiting the Federal Reserve’s decision on Wednesday and, as expected, a rate hike by the Bank of Japan on Friday. The Bank of England is likely to leave rates unchanged on Thursday, although the vote could be close.

After data showed an acceleration in U.S. consumer inflation in August, traders increased their bets on higher borrowing costs. According to futures markets, the probability of such a move this week stands at 86%. Investors are also expecting another rate hike by the end of the year.

The Federal Reserve may decide to wait, but that is complicated by the fact that its October meeting will take place immediately before the U.S. midterm elections. Delaying the decision until December would be too long.

– Shane Oliver

The euro traded at $1.159, while sterling was around $1.3524. The dollar index, which tracks the U.S. currency against six major currencies, remained near 99.15 after two weeks of modest declines.

U.S. Treasury yields remained near multi-year highs. The yield on two-year notes, which typically responds sensitively to expectations surrounding Federal Reserve decisions, edged down to 4.6148%. It rose by 26 basis points last week.

Despite rising bond yields and changing rate expectations, the dollar has yet to strengthen. Central banks in other major economies may also raise rates, while doubts about confidence in Federal Reserve policy continue to weigh on the U.S. currency.

We believe the dollar will respond positively to a rate hike, as it would reaffirm confidence in Federal Reserve monetary policy and somewhat ease the trend toward asset depreciation.

– ING analysts

At the same time, the dollar does not need to rise too sharply. In our view, this is about recalibrating Federal Reserve policy, not the beginning of a new cycle.

– ING analysts

At the start of the Asian session, Brent crude futures rose by nearly 3% to $107.51 a barrel. The market was affected by fresh Houthi strikes on Saudi Arabia, Iranian attacks on vessels in the Persian Gulf, and the closure of a major Saudi oil pipeline, heightening concerns about supply disruptions.

Yen awaits Bank of Japan decision

The yen stood at 153.49 per dollar, remaining close to the seven-month high of 152.89 recorded last week. Investor sentiment toward the Japanese currency has shifted, with speculators building a net long position in the yen for the first time since February.

The yen has strengthened by about 4% since the beginning of September. The market expects the Bank of Japan to accelerate its rate hikes, while Japanese investors may begin repatriating assets from overseas.

A 25-basis-point rate hike is already almost fully priced in. For the yen to continue strengthening, the Bank of Japan must signal its intention to maintain a faster pace of rate hikes.

– MUFG analysts

Analysts at TD Securities believe that a lack of a signal pointing to another rate hike at the October or December meeting could trigger a sharp rebound in the dollar against the yen, to 157–160 yen per dollar.

Not raising rates would be a catastrophic mistake. A lack of clear communication would be a serious miscalculation.

– James Athey

According to James Athey, expectations that Japanese investors will repatriate capital, as well as possible changes in the asset allocation of Japan’s Government Pension Investment Fund, are also having a significant impact on the yen’s movement. The Bank of Japan’s decision and its subsequent signals could determine whether the yen can maintain its recent gains.