Are hawkish BoJ comments nudging the Japanese Yen higher within its previous range?

• USD/JPY slips towards session lows around 158.00 as the 158.40 zone limits its advance.
• Weak trade balance data had little lasting impact as 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.

The Japanese Yen (JPY) is recovering against the US Dollar (USD) on Wednesday, with hawkish remarks from a senior Bank of Japan (BoJ) official outweighing disappointing Japanese Trade Balance figures. Having retreated from a session peak of 158.40, USD/JPY is trading just above 158.00. The pair nevertheless remains within the sideways range established over the past three weeks.

Speaking earlier on Wednesday, BoJ Deputy Governor Ryozo Himino said financial conditions remained accommodative as Japan’s underlying inflation moved closer to the central bank’s 2% target. He also affirmed that medium- and long-term inflation expectations were continuing to rise.

By countering the effect of the weaker Trade Balance data released earlier in the day, Himino’s remarks have strengthened expectations of rate increases at quarterly intervals. Markets expect another quarter-point increase before the year ends, with the December 17 meeting seen as the most likely occasion.

How Will an October Fed Pause and December Hike Pricing Shape the Dollar?

Expectations of a pause at next week's Federal Reserve (Fed) monetary policy meeting are keeping the US Dollar on the back foot. Although risk aversion linked to Middle East uncertainty and elevated Oil prices is limiting further losses in the Greenback, Dollar bulls have so far shown little conviction.

According to Commerzbank analysts, markets have largely looked beyond the prospect of an immediate Fed move. A December increase is already priced in, alongside “a chance that another hike could come by the middle of next year.” Commerzbank’s experts, however, do not fully endorse that outlook.

With markets relying 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 stance "would cause the market to revise its expectations downward, especially for next year", potentially weighing on the US Dollar.