• AUD/JPY has not shown a meaningful reaction to the upbeat Australian PMI data.
• The RBA is expected to slowly push its OCR higher to 4.1% to tame soaring inflation.
• The reason behind widening BoJ’s YCC band was to make them more sustainable.

The AUD/JPY pair has shown a muted response to the upbeat Australian S&P Global PMI. The Services PMI has landed at 48.6 higher than the consensus and the prior release of 48.3. Also, the Composite PMI has scaled to 48.5 against the former release of 48.2. An absence of a contraction in economic activities despite rising interest rates by the Reserve Bank of Australia (RBA) could keep Australian inflationary pressures intact.

The Australian Dollar is expected to remain volatile on Friday ahead of the release of the Caixin Services PMI (Jan). The economic data is seen at 47.3 lower than the former release of 48.0. A decline in the Services PMI could impact the Australian Dollar as Australia is a leading trading partner of China.

Next week, the Australian Dollar will remain in the spotlight due to the interest rate decision announcement by the RBA. The Australian inflation rate has not shown a peak yet as it has shown a fresh high of 7.8% in the fourth quarter of CY2022. RBA Governor Philip Lowe might not have another option than to hike interest rates further.

Analyst at Deutsche Bank Australia sees the RBA likely to drive the Official Cash Rate (OCR) to 4.1%, citing the most recent inflation update of a 7.8% increase in the CPI, which was slightly higher than expected. “While the RBA will likely move more slowly in 2023 than it did in 2022, we now expect four more 25 basis point hikes this year: 25 basis points in each of February and March, and 25 basis points each at the May and August meetings” as reported by Forbes Advisor.

On the Japanese Yen front, investors are awaiting the release of the Jibun Bank Services PMI for fresh cues. The economic data is seen steady at 52.4. The street is still confused about the rationale behind widening the Yield Curve Control (YCC) by the Bank of Japan (BoJ) in its December monetary policy meeting. Meanwhile, BoJ Deputy Governor Masazumi Wakatabe is back on the wires this Thursday, noting that the “BoJ's Dec decision to widen band was a necessary step to make YCC more sustainable, but the move alone may have had the effect of weakening stimulus effect.”