• AUD/JPY weakens to near 111.25 in Thursday’s early European session.
• The cross keeps a bearish vibe, but a temporary rebound cannot be ruled out, with RSI holding above the midline.
• The initial support level is seen at 110.40; the first upside barrier emerges at 111.45.

The AUD/JPY cross trades in negative territory around 111.25 during the early European session on Thursday. Markets could turn cautious later in the day ahead of Tokyo’s Consumer Price Index (CPI) inflation report and the Bank of Japan (BoJ) interest rate decision on Friday.

The BoJ is expected to leave interest rates unchanged at 1.25% at the October policy meeting. The Japanese central bank is anticipated to declare that its “underlying inflation” target of 2% has been met at this meeting, according to reports by Reuters.

Traders will take more cues from the BoJ Press Conference, which might offer some hints about the pace and timing of further hikes. Any hawkish signs from BoJ officials could lift the Japanese Yen (JPY) against the Australian Dollar (AUD).

On the other hand, hotter Australian CPI inflation data has bolstered expectations of Reserve Bank of Australia (RBA) rate hikes. This, in turn, might help limit the Aussie’s losses.

Markets are now pricing in nearly 82% odds of an interest rate increase to 4.85% at the next RBA Board meeting, up from 62% before Australia’s CPI data was released, according to the ASX RBA Rate Tracker.

Yen focus shifts to December as BoJ tests higher-rate resilience

Analysts at Commerzbank note that while the Bank of Japan meets on Friday morning, “few expect the meeting itself to deliver a rate change.” Markets anticipate the overnight rate “remaining at 1.25%, and none of the economists surveyed by Bloomberg expects a hike this week.” For FX markets, they argue, “the more important question will therefore be what the BoJ signals about December,” with markets currently pricing “an around 80% probability of a rate hike by then, in line with our own expectation that the BoJ will raise the policy rate to 1.5%.” In Commerzbank’s view, “recent BoJ communication, alongside the economic backdrop, increasingly suggests that the next step towards policy normalization is approaching.”

They highlight that “additional support for this view came from the BoJ’s semi-annual report on risks to the financial system.” Although “hardly the most obvious source of monetary policy signals,” the report “suggests that higher rates should remain manageable for Japan’s financial system.” In its stress test, the BoJ finds that “even a rise in the policy rate to 2% should not pose major problems for Japanese banks and companies,” noting that “the increase to 1.25% has already been absorbed without significant disruption, as has the rise in longer-term government bond yields.” Commerzbank stresses that the BoJ itself is clear that “the 2% assumption is not a forecast but merely part of the stress test scenario.” Nevertheless, they judge that “the message for FX markets is noteworthy: financial stability does not appear to be a binding constraint on further policy normalization.” As a result, while “Friday itself may therefore provide only limited fresh momentum for the yen,” Commerzbank concludes that its “structurally constructive view on the Japanese currency remains intact.”

Warsh underscores unwavering 2% inflation goal, keeping Dollar bulls alert

Warsh’s press conference tone is firmly hawkish, with the FXS Speechtracker score at 7/10, in line with the historical average and reinforcing a consistent anti-inflation stance. The emphasis that “ensuring price stability is not about a fixed date on a calendar” signals a data-dependent, outcome-focused approach, backed by references to “new monetary medicine,” the removal of accommodation in September, and confidence that inflation expectations are “going the right way” toward the 2% PCE target. Repeated assurances of “no ifs and or buts, we will deliver price stability” and rejection of any “soft inflation target” underline a strong commitment to tightening as needed, a backdrop that tends to support the Dollar and weigh on risk-sensitive assets, particularly in technology and AI where Warsh notes rates are now clearly biting.

The FXS Fed Sentiment Index jumped by +14.39 points to 141.89, firmly in hawkish territory and signaling a meaningful shift toward tighter policy expectations relative to the established baseline. This move, aligned with the unchanged 7/10 FXS Speechtracker score, suggests markets are recalibrating toward a more aggressive Fed reaction function, with implications for Dollar strength and higher yields as investors price in persistent resolve to quash inflation.

Technical Analysis: AUD/JPY remains capped under the 100-day SMA

In the daily chart, AUD/JPY retains a mildly bearish bias as it holds beneath the 100-day simple moving average (SMA) and the upper Bollinger band. Price, however, remains supported above the Bollinger middle band, while the 14-day Relative Strength Index (RSI) at 55 suggests recovering but not overstretched momentum within a broader corrective phase.

On the downside, initial support level is seen at the Bollinger middle band around 110.40, followed by the 110.00 psychological level. A breach of this level could expose a deeper floor at the lower limit of Bollinger band near 109.35, where stronger buying interest could emerge if the pair extends its pullback.

On the topside, immediate resistance level is located at the upper boundary of Bollinger band at 111.45, ahead of the 100-day SMA at 112.00, which together form a cap on further advances. Sustained trading above this level could see a rally to the August 18 high of 113.61.