AUD/JPY rises above 101.00 due to growing uncertainty surrounding the BoJ policy outlook

• AUD/JPY strengthens due to increased uncertainty over the BoJ rate-hike plans.
• The LDP coalition secured only 215 of the 465 lower house seats, missing the 233-seat majority threshold.
• The Australian Dollar gains support due to the hawkish mood surrounding the Reserve Bank of Australia.

The AUD/JPY pair recovers its recent losses seen over the past two sessions, trading around 101.20 during early European hours on Monday. The upward movement in AUD/JPY could be linked to growing uncertainty surrounding the Bank of Japan's (BoJ) rate-hike plans, now compounded by Japan’s ruling coalition losing its parliamentary majority.

In Sunday's election, Japan's long-standing ruling coalition lost its majority in the lower house for the first time since 2009, casting doubt on the BoJ's capacity to proceed with further rate hikes. The Liberal Democratic Party and its coalition partner, Komeito, secured only 215 of the 465 lower house seats, missing the 233-seat majority threshold. Meanwhile, the main opposition, the Constitutional Democratic Party of Japan (CDPJ), gained 148 seats, up from 98.

The Australian Dollar (AUD) finds support following hawkish remarks from the Reserve Bank of Australia (RBA). The RBA emphasized that the current cash rate of 4.35% is sufficiently restrictive to bring inflation within its 2%-3% target range while sustaining employment levels, making an imminent rate cut unlikely.

Last week, RBA Deputy Governor Andrew Hauser underscored Australia’s robust labor participation rate and clarified that, while the RBA is data-dependent, it avoids over-reliance on specific figures. Traders remain cautious as they await key domestic inflation data due on Wednesday, which could influence the RBA’s future monetary policy stance.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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