The yen experienced volatility on Wednesday following the Bank of Japan’s (BOJ) announcement to raise interest rates and outline a comprehensive bond tapering plan. Initially, the yen surged 0.8% to a three-month high of 151.58 per dollar immediately after the BOJ’s decision, only to reverse those gains minutes later as the market had partially anticipated the move. The yen later settled slightly lower at 152.79 per dollar.

The BOJ’s board voted 7-2 to increase the overnight call rate target to 0.25% from 0-0.1%. Additionally, they unveiled a quantitative tightening (QT) strategy, aiming to halve monthly bond purchases from 6 trillion yen to 3 trillion yen ($19.63 billion) by early 2026. The yen’s fluctuations reflect the market’s response to these measures, coupled with the unwinding of short-yen carry trades and interventions from Tokyo.

The yen’s performance contributed to a projected monthly gain of over 5%. Investors also focused on upcoming inflation data from France and the broader eurozone, alongside a key policy decision from the U.S. Federal Reserve.

In other markets, the Australian dollar fell to its lowest since May after core inflation data underwhelmed, reducing the likelihood of further rate hikes by the Reserve Bank of Australia (RBA). The Aussie dropped 0.68% to $0.6494, poised for a monthly loss exceeding 2%. The RBA is expected to meet next week, with markets now anticipating potential rate cuts as early as November.

In China, July’s manufacturing activity contracted for the third consecutive month, prompting expectations for additional economic support measures from Beijing. Despite this, the yuan gained 0.2% to 7.2374 per dollar.

The euro rose 0.08% to $1.0824, looking to close July with a 1% gain, supported by a weaker dollar. Recent data showed the eurozone economy grew slightly more than expected in the second quarter, though the outlook for the rest of the year remains uncertain.

Sterling edged up 0.06% to $1.28445, eyeing a monthly gain of 1.6%, while the New Zealand dollar was up 0.02% at $0.5904, on track for a 3% monthly decline.

The market’s attention is now on the Federal Reserve’s rate decision, which is expected to set the tone for broader currency movements. Investors anticipate the Fed to signal a September rate cut, with markets pricing in approximately 68 basis points worth of cuts by the end of the year. The dollar index dipped 0.04% to 104.39, heading for a nearly 1.4% loss for the month.