USD/JPY extends consolidation below 108.50 as markets pause ahead of Fed announcements

• Wall Street stays flat in the first half of the session on Wednesday.
• FOMC is expected to keep the interest rate unchanged.
• 10-year US T-bond yield gains 2%, DXY drops below 97.50.

For the third straight day this week, the USD/JPY pair is fluctuating in a tight range as investors are eagerly waiting for the FOMC to announce its policy decision and release its updated economic projections. As of writing, the pair was trading at 108.37, losing 0.06% on a daily basis.

The subdued trading action in stock markets confirms that investors are unwilling to make any bets amid the uncertainty regarding the Fed's policy outlook. Although many experts see the FOMC opening the door for rate cuts later this year, last week's upbeat retail sales and industrial production data from the U.S. reminded markets that hard economic data don't yet show any signs of a notable economic slowdown.

Previewing today's critical FOMC event, "The big question is whether Fed officials consider its time to do it, or if they can wait to gather more data before dropping the rate-cut bomb. By the end of last week, odds for a rate cut next July were of about 80%, and a clear sign toward such a move will be Fed officials dropping 'patient' from the statement," said FXStreet Chief Analyst Valeria Bednarik.

"If that's not the case, the greenback could get a nice boost, although Wall Street will probably suffer. Market's eyes will also be on the dot-plot and any change there."

Meanwhile, the 10-year Treasury bond yield rebounded today and was last seen adding 2% on the day. However, this move could be a product of short-covering ahead of the Fed rather than market pricing of a hawkish statement. Nevertheless, the 0.25% drop seen in the US Dollar Index shows that the broad USD weakness makes it difficult for the pair to capitalize on the T-bond yield rally.

Technical levels to watch for