The US Fed has said that it expects to keep interest rates on hold until 2013

USD/JPY is trading below the level seen last week when the BoJ stepped in to stop the rout on JPY strength. With US rates now on hold until at least 2013 and market expectations that QE3 may not be that far away, is there really anything the BoJ can do to stop the JPY strength? We have seen yet again Japanese officials commenting in the Asia session that they are closely watching the markets and that one-sided JPY rises are negative for the Japanese economy but there seems little they can do other than intervene as the fundamentals seem here to stay for a good while longer. On the day there are importer bids at 76.50, with exporters capping at 77.50 so risk as in all forex markets will dominate proceedings.

It took a long time for the markets to digest the US Fed’s statement that it will be keeping interest rates on hold till mid-2013, adding to recent high volatility. The end view was that the statement was risk-friendly, with Fed Chairman Ben Bernanke acknowledging that economic conditions had become less favourable and the inflation outlook had become subdued over the medium term with rates looking to be on hold until at least 2013. This makes history, being the longest period ever in a change in US rates (seven years). With relief in risk this pair looks set to test the highs made in Sydney on Monday (1.4430) but expect the volatility to continue as forex plays second fiddle to the risk environment.

The main event in the UK calendar is to be released today in the form of the UK quarterly inflation report today. Sterling had a quiet Asian session after some calm was restored to equity markets following the FOMC announcement. Most expect the MPC to revise near to medium-term inflation forecasts higher. With regard to growth, the market view seems a negative one with revisions expected to near term targets.