How is the bond market sell-off impacting the FX market ahead of next week’s BoJ & Fed policy updates?
The FX market appears to show resilience amid a notable sell-off in bond markets, primarily influenced by rising global yields as traders incorporate more hawkish central bank expectations. Per the full note from MUFG EMEA, while the bond market's trajectory has pressured other asset classes, the Japanese yen has performed well this week, buoyed by shifting expectations for Bank of Japan (BoJ) rate hikes. However, disappointing dollar performance highlights the ongoing complexities of market sentiment ahead of pivotal rate decisions from both the BoJ and the Fed.
What the desk is arguing
The recent bond market sell-off signifies a notable shift in market dynamics, particularly impacting FX trading. Analysts at MUFG, including Lee Hardman and Seiko Kataoka-Fisher, argue that while there has been a rise in global yields, the direct spillover effects into the FX market have so far been modest. As noted in their commentary, the yen has rebounded due to expectations of a faster pace of rate hikes from the BoJ, particularly following a breach of critical support levels at 155.
Furthermore, the lackluster performance of the dollar this week, which failed to maintain its strength, adds another layer to the current FX landscape. This juxtaposition of stronger JPY against a weakening dollar amid shifting central bank expectations emphasizes the effects of varying monetary policy postures and market risk sentiment.
Where it sits in our coverage
Based on our internal coverage, the current consensus target for USD/JPY sits at 1.075, with a range spanning from 1.04 to 1.12. Key firm projections include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's view aligns closely with jpmorgan, where it anticipates a run towards the upper end of the range as market expectations evolve, while bofa remains more conservative in their outlook.
How other firms see it
Several firms appear to align with this bullish view on the yen, focusing on the impending action from the BoJ as a main driver. Notable aligned firms include jpmorgan and gs, emphasizing the yen's resilience amid a changing rate landscape. On the contrary, firms like bofa express skepticism about sustained JPY strength, potentially rooted in broader economic uncertainties.
Related currency pairs to watch include USD/JPY and EUR/JPY, as the trajectory of these pairs may reflect the anticipated adjustments in monetary policy set by both the BoJ and the Federal Reserve. By monitoring these interactions, traders can gauge potential volatility and shifts in market sentiment moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The bond market sell-off has accelerated, primarily affecting short-term yields.
- 02JPY is rebounding with expectations for faster BoJ rate hikes, breaking below significant support levels.
- 03The dollar's performance has been disappointing, indicating possible headwinds amidst evolving market sentiment.
- 04Upcoming decisions from the BoJ and Fed could significantly shape currency valuations.
Market implications
Traders should monitor the 155 level in USD/JPY closely, as it may determine the yen's short-term trajectory. Additionally, upcoming Fed commentary will be crucial in assessing whether the dollar can regain its footing, especially against a strong yen amid rate decision anticipation.
Risks to this view
A reversal of the current bullish thesis for the yen could arise if the Fed reinforces a dovish stance in its upcoming meeting or if the BoJ decides to delay expected rate hikes. Additionally, a drastic shift in risk sentiment could undermine the current strength of the yen, potentially reopening above the 155 mark.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst. It's Friday 11th September 2026, and joining Lee to pose some questions on the financial market themes for the week ahead is Seiko Kataoka-Fisher, Director in Japanese Customer Sales for EMEA in London. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.
It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hi Lee.
Hi Seiko. We've seen a sharp sell-off in the global bond markets this week. Are there spillovers into the FX market?
Yeah, like you said, the sell-off in the bond market over the past week has accelerated towards the end of this week. This move higher in global yields has very much been driven by the short end of the curve as markets move to price in more hawkish paths for major central banks. So far, though, we haven't really seen significant kind of spillovers into the FX market or even the equity market.
The equity market has corrected modestly lower by about 1% to 2% over the past week. And that is kind of consistent with a bit more kind of risk off trading in the FX market where we've seen the Swedish krona, New Zealand dollar underperforming while the yen has been the best performer over the past week. Like I say, the yen has continued to rebound, supported by kind of building expectations for the BOJ to speed up the pace of rate hikes.
And that has been encouraged as well by the yen breaking below kind of key support levels at 155 over the past week, which has kind of added to speculation that we could see a deeper correction lower for the yen going forward. The other thing to kind of highlight is the kind of disappointing price action as well for the dollar over the past week. The dollar has failed to strengthen despite the fact that we've seen U.S. rates moving higher to price in a Fed rate hike ahead of next week's meeting.
See the stronger inflation data we've had this week from the U.S. has made it more likely now that the Fed will finally pull the trigger and hike rates next week. But like I said, that hasn't really helped the dollar to strengthen and it's still continuing to trade at lower levels. So the main kind of trigger for the dollar selloff that we saw over the summer was the announcement from the U.S.
Treasury where they expanded the bond buyback program. And that has continued to remain a headwind for dollar performance in the near term. It's created kind of concern there that U.S. policymakers want to try to suppress yields at the long end of the curve and that that is undermining confidence in the dollar still.
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