He joined the club from Manchester United until January and caught Chris Hughton's eye last season when he was in the Blackburn Rovers side which beat Newcastle 2-1 at St James's Park last season.
He has also had loan spells at Sunderland, Ipswich Town and Royal Antwerp.
Simpson will challenge Ryan Taylor for a place at right-back, but given that United beat Reading 3-0 on Saturday, he might have to wait for a start.
Hughton: "He had his first training session yesterday, and he'll be available for Sheffield Wednesday.
"He's a young player of energy. He's had a good schooling where he's played his football, and he's also had experience of going out on loan to other clubs.
"We remember him here playing for Blackburn Rovers at St James's.
"It's the right time, and I think he'll be a bonus for the squad."