The waiting is always the hardest part

Indeed, the waiting game is often the most challenging aspect.

As anticipation builds, the Bank of Japan is set to announce its potentially historic policy decision on Tuesday. This event unfolds amidst a backdrop of positive investor sentiment fueled by a surge in bullish tech sentiment, which managed to counterbalance the impact of higher US bond yields. The optimistic mood spilled over into global markets, lifting stocks worldwide on Monday.

With Japan's Nikkei already kicking off the week with close to a 3 % gain and China presenting a broadly positive batch of economic data on Monday, markets around the world find themselves on solid footing ahead of the much-anticipated BOJ fireworks.

In addition to the BOJ's decision and Governor Kazuo Ueda's press conference on Tuesday, the Asia and Pacific calendar also features the Reserve Bank of Australia's latest policy decision. 

The Bank of Japan's upcoming policy decision holds significant implications, as it is anticipated to raise rates for the first time in 17 years, effectively ending eight years of negative interest rate policy. Additionally, there are indications that the central bank may also opt to conclude its yield curve control (YCC) measures and cease purchasing risky assets, as reported by the Nikkei newspaper on Monday.

Should the BOJ indeed proceed with a full-on triple option attack —adjusting rates, ending YCC, and halting purchases of risky assets—the global market could be in for a wild ride.

The question of whether the Fed or the BoJ will trigger an uptick in foreign exchange (FX) volatility depends on various factors and is subject to market dynamics.

The Fed's monetary policy decisions, particularly regarding interest rates and comments about asset purchases, can significantly influence FX markets. Any unexpected shifts in the Fed's stance, such as indications of a steady state or slower pace of easing, will likely impact currency valuations and increase volatility.

Similarly, the BoJ's decisions, including changes to interest rates or adjustments in its quantitative easing program, can have a pronounced effect on FX markets, especially for the Japanese yen (JPY). Any unexpected hawkish policy moves by the BoJ could contribute to heightened volatility in currency markets.

The major currency rates are relatively stable as markets brace for a busy week of G10 central bank updates. Today, the Reserve Bank of Australia (RBA) and the Bank of Japan (BoJ) will be the first among the G10 central banks to hold their policy meetings, followed by the Federal Reserve on Wednesday. Subsequently, the Swiss National Bank (SNB), Norges Bank, and Bank of England will convene on Thursday.

Certainly, the Australian dollar and the yen are likely to be among the most actively traded currencies in the wake of the BoJ's highly anticipated policy decision, even with a steady state RBA.

The Aussie/yen cross, which is often regarded as a key gauge of investors' appetite for overall global risk sentiment, is expected to attract significant attention on Tuesday.

The dense schedule of G10 central bank updates has the potential to trigger, at the very least, a temporary uptick in foreign exchange volatility in the upcoming week. This closely follows the year-to-date lows observed at the end of last week.

The Federal Reserve holds a unique position in financial markets, often setting the tone for global market sentiment and influencing the direction of monetary policy worldwide. As the central bank of the world's largest economy, the Fed's policy decisions, statements, and economic projections are closely scrutinized by investors and market participants globally.

In contrast, other central banks, such as those in the G10 countries, are often seen as "price takers," meaning actions taken by the Fed influence their policy decisions. While these central banks have significant influence within their respective economies, their policies may be more reactive to external factors, particularly those emanating from the Fed.

Ahead of today's Bank of Japan (BoJ) policy update, there has been a notable rise in the USD/JPY pair, bringing it closer to the key 150.00 level. This movement is occurring despite increasing speculation that the BoJ could announce an exit from loose policy settings, particularly following stronger wage negotiation results last week.

According to Bloomberg, Japan's Overnight Index Swap (OIS) market is currently pricing around 6 basis points (bps) of hikes into today's policy meeting. The recent announcement from the Japanese Trade Union Confederation (Rengo) that unions had secured an average total pay hike of 5.28% in their preliminary results has further increased the likelihood that the BoJ will begin tightening monetary policy at tomorrow's meeting, potentially moving sooner than initially anticipated.

The policy changes have been well-telegraphed and are aimed at facilitating a smoother transition away from the exceptionally loose policy settings that have been in place in Japan. Hence, it is unlikely that we will see a sharp adjustment higher for yields in Japan in the week ahead. As a result, it may be challenging for the Japanese yen (JPY) to strengthen significantly, even as the BoJ ends negative rates and Yield Curve Control (YCC).

The hawkish repricing in the US rate market is one significant factor contributing to the rebound of USD/JPY and its subsequent movement back closer to the 150.00 level this week.

The 2-year US Treasury bond yield has surged by approximately 60 basis points since its low point in January. This surge has been primarily driven by the scaling back of expectations for Federal Reserve rate cuts. As market participants adjust their expectations for future interest rates in the United States, the USD/JPY pair has responded with an upward drift.

At this week's Federal Open Market Committee (FOMC) meeting, the Federal Reserve's updated policy rate and economic outlook projections are anticipated. Expectations suggest that these updated projections will largely remain unchanged compared to those presented at the December FOMC meeting.

In December, the median dot indicated that the Fed favoured cutting rates three times throughout the year. However, a closer look at the dispersion of the dots reveals that just two participants shifting from projecting three cuts to two would be sufficient for the median dot to move to a total of two cuts for the year.

This scenario poses the main upside risk for the US dollar (USD) in the week ahead, as it could further encourage the US rate market to scale back expectations for Federal Reserve rate cuts. Any indication from the FOMC meeting that supports a less dovish stance than previously anticipated could lead to a reassessment of rate cut expectations and subsequently bolster the USD.