USD/JPY has edged lower in the Wednesday session, erasing small gains recorded on Tuesday. Currently, the pair is trading at 111.29, down 0.26%. On the release front, central banks will be in focus, as the Federal Reserve and the Bank of Japan publish rate statements.
There is growing speculation that the Japanese government may call a snap election on Monday, with the vote to be held on October 22. Abe has seen his ratings improve over the North Korean crisis and with a weak opposition, he is gambling that the move will pay big dividends. The Japanese economy has improved in 2017, as stronger global demand has boosted the manufacturing and export sectors. However, the country’s radical stimulus program, known as ‘Abenomics’, has failed to push inflation levels anywhere near the BoJ’s target of just below 2.0%. The Bank of Japan releases a rate statement later on Wednesday, and a hawkish message from the BoJ could send the yen to higher ground.
All eyes will be on the Federal Reserve, as the central bank releases its September rate statement. The FOMC is expected to hold the benchmark rate at 1.25%, so analysts will be looking for details about the the Fed balance sheet and a possible rate hike in December. Earlier in the year, the Fed outlined plans to begin reducing its bloated balance sheet of $4.2 trillion, and the markets are expecting more details, such as a start date for the tapering. The Fed is expected to reduce the balance sheet by not replacing some maturing bonds, starting at $10 billion/month, and gradually moving higher. This move can be viewed as a mini-rate hike, and could provide a boost for the US dollar against major rivals. However, if the Fed does not address its balance sheet, the markets could get nervous and the US dollar could lose ground. As for inflation, persistently low levels remains well below the Fed target of 2% and this has hampered plans for a third rate hike in 2017. Janet Yellen has not discussed a December move, but in recent weeks, some FOMC members have come out against another rate hike before inflation moves higher, even if this means waiting until 2018. If the rate statement addresses the timing of another rate hike, we could see substantial movement from the US dollar.
