USD/JPY reaches multi-month lows near 109.20 ahead of FOMC, BOJ

• USD/JPY lacks directional strength in the middle of the week.
• Higher US Treasury yields underpins the demand for the US dollar.
• FOMC and Bank of Japan (BOJ) rate decision to drive market sentiment.

USD/JPY treads water in the early Asia session on Wednesday morning. The pair continued with its downside movement that started at the beginning of the week. Traders braced themselves for both central banks' decisions and remained hopeful for the break of the familiar trade range for USD/JPY between 109.20 and 110.20 that it posted for the past two-month. At the time of writing, USD/JPY is trading at 109.23 down 0.01% for the day.

The US benchmark 10-year Treasury yields rose by 1.4 basis points to 1.32% following the House of Democrats vote that would suspend the US debt ceiling until after the 2022 congressional elections. The greenback remained elevated above 93.20 following the upbeat economic data. The US Housing Start jumped 3.9% in August whereas Building Permits rose 0.6% from a month earlier in August, the highest level since April.

Investors digested the threat of China’s property giant Evergrande’s risk even as Beijing showed no signal of intervening to stem any domino effects. The major theme remained the Fed’s tapering decision and the Bank of Japan views on the economy as the market widely estimates no surprise from the central banks on their monetary policy stance. The market will react to any signal concerning the timeline and pace of tapering its asset purchases. The speed of reduction could be taken as a hint to some degree of the timing of the first Fed rate hike. 

On the other hand, the Japanese Yen gained its safe-haven appeal ahead of the crucial decision by the central bank.  Investors already discounted no surprise from the Bank of Japan’s (BOJ)  monetary policy decision which is due today on fragile economic growth and deflation risk.

As per Reuters, the central bank is expected to talk about the risk to the economic outlook arising front the pandemic such as supply-chain bottlenecks caused by the Asian factory shutdowns. Additionally, the US Existing Home Sales data would also be on traders radar to gauge the market sentiment.