AUD/JPY advances to near 95.50 amid positive China outlook, looming BoJ decision

• AUD/JPY gains as the JPY weakens ahead of the Bank of Japan's monetary policy decision.
• The BoJ is expected to keep interest rates unchanged at 0.5% when its meeting concludes on Wednesday. 
• The Australian Dollar strengthens on optimism surrounding China's economic outlook.

AUD/JPY extends its winning streak for a third consecutive session, trading around 95.50 during early European hours on Tuesday. The currency cross appreciates as the Japanese Yen (JPY) faces pressure ahead of the Bank of Japan's (BoJ) upcoming monetary policy decision.

The BoJ is widely expected to keep interest rates steady at 0.5% when its meeting concludes on Wednesday. However, expectations remain for a rate hike later this year, supported by rising wages and persistent inflation, paving the way for policy normalization.

Last week, major Japanese firms agreed to significant wage increases for the third straight year, aiming to support workers against inflation and address labor shortages. Higher wages are expected to boost consumer spending, drive inflation, and provide the BoJ with more flexibility for future rate hikes.

Meanwhile, the AUD/JPY cross gains support as the China-linked Australian Dollar (AUD) strengthens, while the safe-haven JPY weakens amid an improving economic outlook in China. Over the weekend, China introduced a special action plan to revive consumption, including measures to raise wages, boost household spending, and stabilize stock and real estate markets.

However, the upside for the AUD/JPY cross could be limited as the AUD faces headwinds from rising geopolitical tensions in the Middle East. The US reaffirmed its commitment to striking Yemen's Houthis until they cease attacks on Red Sea shipping, adding to market uncertainty.

Additionally, Reserve Bank of Australia (RBA) Assistant Governor (Economic) Sarah Hunter stated late Monday that the central bank will take a cautious approach to rate cuts. The February statement indicated that the RBA board remains more conservative than market expectations regarding further easing. Hunter also emphasized the importance of monitoring US policy decisions and their impact on Australian inflation.