Hawkish BoJ comments nudge Japanese Yen higher within previous range

• After failing to advance beyond the 158.40 area, USD/JPY slips towards session lows around 158.00.
• Weak trade balance figures were counterbalanced by BoJ Deputy Governor Himino’s remarks, which kept further interest rate increases on the table.
• With traders ruling out an October rate rise and assessing the extent of the Fed’s tightening cycle, the US continues to face pressure.

Disappointing Japanese Trade Balance figures have failed to prevent the Japanese Yen (JPY) from recovering against the US Dollar (USD) on Wednesday, supported by hawkish remarks from a senior Bank of Japan (BoJ) official. Having reversed from session highs of 158.40, USD/JPY has fallen to just above 158.00. The pair nevertheless remains within the sideways range established over the past three weeks.

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

By countering the effect of the weak Trade Balance release earlier in the day, Himino’s remarks have strengthened expectations of rate increases at quarterly intervals. Markets expect another quarter-point rise before the end of the year, with the 17 December meeting considered the most likely occasion.

Dollar takes its cue from October Fed pause and December rate rise expectations

With traders preparing for the Federal Reserve (Fed) to leave policy unchanged at next week’s meeting, the US Dollar remains under pressure. Uncertainty in the Middle East is fuelling risk aversion, which, alongside elevated oil prices, is limiting further losses in the Greenback. Even so, Dollar bulls have so far shown little conviction.

According to analysts at Commerzbank, attention has largely moved beyond an immediate Fed policy change. Markets are pricing in a December rate rise and “a chance that another hike could come by the middle of next year.” Commerzbank’s experts do not fully endorse that outlook.

As markets build on 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,”. By contrast, its analysts warn that a departure from a restrictive policy stance "would cause the market to revise its expectations downward, especially for next year", potentially weighing on the US Dollar.