While monetary policy seems to favor USD/JPY strength, there remain uncertainties in the fourth quarter. The Fed continues to closely monitor the labor market, which could sour if the Delta variant dampens sentiment. GDPNow – a more immediate estimate of growth from the Atlanta Fed branch – was materially revised lower for the third quarter.
Still, the Fed’s updated economic projections saw the Core PCE rate forecast boosted to 2.3% in 2022 from 2.1% in June 2021. Should price pressures remain elevated as growth slows, the Fed could end up in a sticky situation. Fighting inflation likely means raising interest rates sooner than expected. That may come at the cost of economic growth.
Chair Jerome Powell’s commentary hinted at completing quantitative easing tapering by the middle of 2022. Should this look possible, there could be room for near-term USD/JPY weakness. In the long run however, this could set the pair up for more preferable risk-reward scenarios to the upside as the Fed likely raises rates before the BoJ.