As Fed officials turn more hawkish about tackling U.S. inflation, bets on yen intervention may be better placed against the pound than the greenback.

USD/JPY dipped on Friday after Japanese Finance Minister Katsunobu Kato said the currency market is experiencing one-sided, sharp moves, signaling that authorities are ready to take appropriate actions to address imbalances. These comments precede a speech by Bank of Japan Governor Kazuo Ueda before business executives on Monday, where he will likely gather more insights on inflation pressures. Recent data, including pricing and GDP suggest rising risks that he could hint at policy tightening.

Hawkish signals from the Bank of Japan add a layer of support to the yen when the MOF opts to intervene. Both times Japanese authorities stepped in this year to buy the yen above 158, Ueda subsequently said yen weakness may influence policy.

The options market sees a growing risk of intervention as USD/JPY nears that 158 level and overnight volatility, at 8.9%, shows the market sees a modest chance that Ueda’s speech will be impactful. Option flows on Friday, however, show less appetite for a sustained dollar rally than a full USD/JPY reversal.

Given the Fed’s more hawkish stance and heightened intervention risks, traders may look to capitalize on a stronger yen by shorting the pound rather than the dollar. GBP/JPY has fallen below its Ichimoku base line and is nearing the lower end of its narrow Bollinger range at 195.33. A further decline could see downward momentum build and a test of a thinning cloud around 191.26.

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(Robert Fullem is a Reuters market analyst. The views expressed are his own.)

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