The AUD/JPY currency pair traded flat around 110.20 during early European hours on Tuesday, with market participants adopting a cautious stance ahead of the Bank of Japan's (BoJ) upcoming interest rate decision scheduled for Friday [1]. The BoJ is widely expected to raise its policy interest rate by 25 basis points to 1.25%, which would mark the highest level in approximately 31 years. This follows a previous rate hike to 1.0% at the June meeting [1]. MUFG analysts noted that a 25 basis point hike is almost fully priced in by the market, and for the yen to strengthen further, the BoJ would need to signal a commitment to a faster pace of rate hikes [1].
Brown Brothers Harriman analysts highlighted that the BoJ is expected to raise the policy rate by 25 basis points after pausing in July, citing underlying inflation near the 2% target and an economy running slightly above capacity [1]. They also mentioned that a 50 basis point hike cannot be ruled out, as it would help contain inflation expectations and cap longer-term Japanese government bond yields. Looking forward, markets are seeking indications of another 25 basis point hike by year-end, with the swaps curve implying rates could approach 2.00% over the next twelve months. BBH analysts believe the BoJ has room to endorse this trajectory, as the policy rate is near the bottom of its estimated neutral range of 1.10–2.50% [1].
On the Australian side, a hawkish stance from the Reserve Bank of Australia (RBA) continues to support the Aussie dollar. RBA Assistant Governor Sarah Hunter stated that the central bank may need to raise interest rates again if inflation proves more persistent than expected [1]. Market pricing currently reflects a 76% chance that the RBA will raise the Official Cash Rate to 4.60% at its next board meeting, according to the RBA Rate Tracker [1].
From a technical perspective, AUD/JPY remains under bearish pressure, trading well below the 100-day simple moving average and the Bollinger middle band. The Relative Strength Index (RSI) is near 30, indicating oversold conditions, but the downside bias persists as long as the price remains capped beneath clustered daily averages [1].
CONCLUSION
The AUD/JPY pair is trading cautiously as markets await the BoJ's anticipated rate hike and monitor the RBA's hawkish signals. While a 25 basis point BoJ hike is largely priced in, further yen strength would require more aggressive guidance from the central bank. Technical indicators suggest ongoing bearish pressure for AUD/JPY, with market sentiment remaining cautious.