Japanese Yen gains within prior range on hawkish BoJ remarks

• 158.00 is back in focus as USD/JPY slips towards session lows, having failed to clear the 158.40 area.
• Weak trade balance data lost its impact after BoJ Deputy Governor Himino signalled that further rate increases remained possible.
• Pressure persists on the US as traders rule out an October rate increase and assess how far the Fed’s tightening cycle could extend.

158.00 is just below where USD/JPY is trading on Wednesday. The pair has retreated from a session high of 158.40 but remains inside the sideways range of the past three weeks. Hawkish remarks from a senior Bank of Japan (BoJ) official have helped the Japanese Yen (JPY) recover ground against the US Dollar (USD), despite disappointing Japanese Trade Balance data.

Japan’s underlying inflation is nearing the central bank’s 2% target, BoJ Deputy Governor Ryozo Himino said earlier on Wednesday. He also noted that financial conditions remain accommodative and that medium- and long-term inflation expectations are still increasing.

The remarks outweighed the weaker Trade Balance figures released earlier in the day and strengthened expectations of rate increases at a quarterly pace. Markets expect another quarter-point rise before year-end, with the December 17 meeting seen as the most likely date.

October pause, December hike: Fed pricing shapes Dollar outlook

Expectations that the Federal Reserve (Fed) will hold rates at next week’s monetary policy meeting continue to weigh on the US Dollar. Uncertainty in the Middle East and elevated oil prices are fuelling risk aversion, limiting further losses in the currency. Even so, Dollar bulls have shown little momentum so far.

With a December rate increase already priced in, markets have largely moved beyond the prospect of an immediate Fed move, according to analysts at Commerzbank. Pricing also reflects “a chance that another hike could come by the middle of next year.” Commerzbank’s experts do not fully agree with that scenario.

As markets reinforce existing expectations for a December move, the bank argues that “if the Fed delivers a hawkish pause next week, the dollar could gain some ground, at least in the short term,”. Its analysts warn, however, that a departure from a restrictive stance "would cause the market to revise its expectations downward, especially for next year", potentially weighing on the US Dollar.