By Brigid Riley

TOKYO (Reuters) – The dollar and yen kept within close ranges on Tuesday as traders awaited key central bank decisions, kicking off with midweek monetary policy meetings from the Bank of Japan and Federal Reserve that could set the tone for coming weeks.

The Japanese currency was taking a breather from its recent rally as the BOJ began its two-day meeting on Tuesday, having surged over 2% against the dollar last week.

A slew of factors have collided to help the yen strengthen from the 38-year low of 161.96 hit against the dollar at the start of the month, including a global stock rout and increased bets for Japan’s central bank to hike interest rates this week.

Markets are currently pricing in a 63% chance of a 10 bps hike.

The BOJ has already said it will announce quantitative tightening (QT) plans, with the middle-of-the-road view calling for the bank to gradually halve its monthly bond purchases over a two-year period.

But questions remain about whether the BOJ will increase rates on Wednesday amid tepid economic growth.

“The real risk from the BOJ is no hike and a weaker yen, given their tendency to undershoot expectations at recent meetings, and hopes of a hike sitting quite high,” said Matt Simpson, senior market analyst at City Index.

The greenback was 0.08% higher against the yen, fetching 154.125.

If the BOJ skips a hike, dollar is likely to establish near-term support around current levels against the yen, said Andy Ji, senior Asia FX strategist at InTouch Capital Markets.

While expectations of narrowing interest rate differentials have helped take pressure off the yen, Ji said the still wide U.S.-Japan yield differential “is another reason that the yen rally will meet more resistance.”

The Fed is widely expected to stand pat on Wednesday, although markets are betting the U.S. central bank will begin cutting rates at the following meeting in September.

Investors will be listening for any hints that Fed Chair Jerome Powell may drop on how soon policymakers are prepared to cut rates at his press conference.

While the Fed does not meet in August, Powell could also use the Jackson Hole gathering of central bankers later in the month to prepare the market for a rate cut, giving policymakers more time to assess economic data.

That includes Friday’s July employment report, with Fed officials becoming increasingly focused on the potential for harm to the labor market if they keep borrowing costs above inflation for too long.

But failing to give a clear signal of a September cut this week could lead to a strengthening of U.S. Treasury yields and the dollar, said City Index’s Simpson.

The , which measures the currency against a basket of peers, was little changed at 104.56.

Meanwhile, the Bank of England’s first interest rate cut since 2020 hangs in the balance amid increased uncertainty, as key policymakers have not spoken publicly for more than two months due to rules in the run-up to July 4’s election.

Sterling was last trading at $1.2857, down 0.02% on the day. The euro was up 0.05% at $1.0824.

Elsewhere, the Australian dollar rose 0.09% versus the greenback to $0.65555 ahead of a key inflation report due Wednesday that could make or break the case for another hike from the Reserve Bank of Australia.

The climbed 0.27% to $0.58915, inching off multi-month lows hit on Monday.

In cryptocurrencies, bitcoin fell 1.08% to $66,634.87.