USD/JPY surpasses 135.50 as DXY recovers, Fed’s pre-anxiety hit market mood

• USD/JPY has crossed 135.50 as the DXY has rebounded firmly ahead of Fed policy.
• An interest rate decision by the Fed will widen the Fed-BOJ policy divergence.
• The BOJ will continue with its ultra-loose monetary policy to spurt the growth rate.

The USD/JPY pair has displayed a meaningful rebound after hitting a low of 136.30 in the Asian session. The asset has surpassed the crucial hurdle of 135.50 and is heading towards Monday’s high at 136.80. Market mood is expected to turn sour as investors usually get anxious ahead of the interest rate decision by the Federal Reserve (Fed).

On a rate hike announcement by the Fed, the USD/JPY is likely to be the major victim as the Fed-Bank of Japan (BOJ) policy divergence will escalate further. There is no denying the fact that the option of a 1% rate hike is not viable now as the US economy is likely to meet the recession situation ahead. However, price pressures are still persisting in the US economy and the Fed will announce a rate hike by 75 basis points (bps).

While the BOJ is committed to flush liquidity in the economy as it has been fragile after the pandemic period and has yet not returned to its pre-pandemic levels. This will escalate the Fed-BOJ policy divergence and may strengthen the pair more.

Apart from the Fed policy, investors' focus will remain on the US Durable Goods Orders data, which is due on Wednesday. The economic data is seen at -0.2%, lower than the prior release of 0.8%.  This indicates a severe slump in the aggregate demand as Retail data remained higher, which is contaminated with higher energy bills and costly food products.