The Bank of Japan is reportedly expected to hike interest rates in June, with traders pricing in 80% odds for a June 16 hike, contingent on no severe Middle East conflict escalation. Meanwhile, the US Federal Reserve may abandon its easing bias before the June FOMC meeting, supporting the US dollar.
Diverging central bank policies between Japan and the US, coupled with geopolitical risks, are creating significant currency market volatility, impacting global trade and investment flows.
The Bank of Japan (BOJ) is reportedly expected to implement an interest rate hike in June, provided there is no significant escalation in the Middle East conflict that could destabilize markets. Sources indicate that BOJ policymakers will closely monitor developments until the last moment before making a final decision. This expectation is largely priced into the market, with traders assigning approximately 80% odds to a rate hike on June 16. Governor Ueda has also reaffirmed the bank's policy direction toward inflation fighting. The BOJ is also leaning towards pausing or slowing its bond tapering program for the upcoming fiscal year.
Meanwhile, the US dollar has been rangebound, finding support from renewed Middle East tensions, including Iran attacking US bases, and the potential for a hawkish Federal Reserve decision. The ongoing closure of the Strait of Hormuz is contributing to elevated oil prices. President Trump suggested the Strait could remain closed through September. The Federal Reserve is anticipated to abandon its easing bias ahead of the June FOMC meeting, which could further boost the dollar. The Indian Rupee has been losing ground as hopes for a US-Iran deal diminished and Middle East tensions pushed oil prices higher. The Rupee's movement is closely correlated with oil prices. Technically, USD/INR has moved back above a trendline and the 96.00 resistance level, suggesting a bullish bias, with buyers expected to emerge around this support zone.