The level of uncertainty in the market is off the scale ahead of tomorrow's Federal Reserve meeting, which affects the current dynamics of the dollar-yen pair.

What helps USD?

The US currency regained its wings at the beginning of the week. Yesterday, the DXY index soared by almost 0.8% and hovered around a weekly high at 112.

The fuel for the greenback was the strengthening of hawkish market expectations ahead of the Fed's monetary policy meeting.

The event at which American officials are to announce their decision on interest rates will be held on Wednesday – November 2.

Now most traders expect that the Fed will raise the indicator by 75 bps for the fourth time in a row. The probability of such a scenario is estimated at 89.2%.

The market's confidence in the hawkish determination of the Fed has a positive effect on the yield of 10-year US government bonds. Yesterday, the indicator rose to 4.06%, which put strong downward pressure on the JPY rate.

The yen, which is extremely sensitive to the difference in the yield of US bonds and their Japanese counterparts, fell by more than 0.8% against the dollar on Monday and approached a 30-year low at 149.

The sharp drop in the JPY was also facilitated by the dovish decision of the Bank of Japan, which was adopted at the end of last week.

Despite the acceleration of inflation in the country, the BOJ has maintained an ultra-soft monetary rate, which implies negative interest rates.

The fact that Japan left the indicator unchanged, while America is preparing for the next round of rate hikes, further intensified the divergence in monetary policy of these two countries.

Most experts believe that until the monetary divergence begins to shrink, the yen will remain in a downtrend. However, judging by the forecasts regarding the Fed's future course, this will not last that long.

What prevents the dollar?

Now the main obstacle to the strengthening of the US currency is the growth of speculation about a possible slowdown in the pace of interest rate hikes. We are not talking about the November Fed meeting, but about more distant prospects.

Weak US economic statistics, which were published last week, significantly increased market concerns about the impending recession in America.

Most analysts believe that signs of weakening economic growth may force the Fed to reduce the degree of aggressiveness towards interest rates.

Goldman Sachs analysts predict that in December the US central bank will raise the indicator not by 75 bps, but by 50 bps.

More slowdown is expected in February and March next year. According to experts, rates will be raised by only 25 bps during this period.

A less hawkish long-term scenario severely limits the dollar's growth, even though the USD may receive another boost from the Fed tomorrow.

This morning, the greenback sharply moved to decline in all directions, also against the yen. At the time of preparation of the material, the USD/JPY major plunged by more than 0.5% and fell below the 148 mark.

Pessimistic expectations of key US economic data contributed to the rapid decline of the asset.

Today traders will focus on the ISM index of business activity in the manufacturing sector for October. According to preliminary estimates, the indicator will decrease to 50.0 against the previous value of 50.9.

Investors fear that, if this forecast is implemented, the Fed may indeed change its anti-inflationary plans to less hawkish ones.

In this case, the differential in US and Japanese interest rates will begin to shrink, which will help the yen strengthen against the dollar.