What will happen next with US rates? This is the main issue that traders on the USD/JPY pair are worried about right now. We might receive the answer today, and it will be a key trigger for the asset.

Today can radically change the balance of power in many dollar majors. The minutes of the Federal Reserve's November monetary policy meeting will be released.

Recall that the U.S. central bank raised the interest rate again this month by 75 bps. However, most market participants now believe that this was the last major increase within the framework of the current tightening cycle.

Many traders expect the Fed to be less aggressive as early as December and raise the rate by just 50 bps as U.S. inflation begins to slow down.

Such sentiment negatively affects the dollar's dynamics, which has significantly strengthened against all of its major competitors this year thanks to the Fed's hawkish rate.

The greenback has declined by more than 4% since the beginning of November, when the market was flooded with a wave of speculations about a possible slowdown in the pace of rate hikes in America. Moreover, it showed the worst dynamics against the yen.

The JPY has suffered from the Fed's aggressive policy far more than any other Group of 10 currency this year because it found itself in the most difficult fundamental conditions.

The Bank of Japan is the only central bank among major central banks that has not defied inflation and has never raised interest rates this year.

The strong divergence in monetary policy between Japan and the U.S. led the yen to a resounding anti-record last month. Recall that the JPY collapsed to a 32-year low of 152, forcing the Japanese government to conduct a second currency intervention this fall.

Now the Japanese authorities, it seems, can finally breathe. The USD/JPY has ended its long rally. It has already fallen 6.6% from its October high.

This morning the asset was trading just above the 141 level. Yesterday, the dollar made another steep peak in all directions, including against the yen.

The USD/JPY pair fell 0.5% on Tuesday, coming under heavy pressure from less hawkish market sentiment. This is the most powerful trigger for all dollar majors ahead of the FOMC minutes. Other factors, even the Coronavirus news from China, have very little weight against it.

The recent comments of some Fed officials are helping the dollar to stay afloat for now. In their opinion, the U.S. central bank will continue to tighten its monetary policy in order to gain a final victory over inflation.

Most analysts, however, believe that the greenback harbors empty hopes. Most likely, the minutes of the November meeting will show that a majority of Fed members are in favor of slowing the pace of rate hikes.

In that case, the dollar could go into free-fall. Guess who stands to gain the most in this situation? The yen, of course.

– The change in the fundamental picture should have a more significant impact on the Japanese currency than the recent interventions, – analysts at The Wells Fargo note.

Experts are very optimistic about the yen, both in the short and long term. Wells Fargo sees serious potential for JPY growth given that the Fed might stop raising rates at the beginning of 2023.

Strategists predict that by the first quarter of 2024, the USD/JPY exchange rate will be at 135.00.

However, there is another opinion. Some analysts believe that the need for further Fed policy tightening should not be underestimated.

If U.S. inflation turns out to be more robust than expected in November. This could result in the final level of U.S. interest rates rising well above 5%.

In such a scenario, the dollar would be hawkishly supported for some time and the yen would be under pressure.