USD/JPY marches towards 137.00 as Fed-BOJ policy divergence widens further

• USD/JPY is advancing towards 137.00 on expectations of widening Fed-BOJ policy divergence.
• A downward shift in inflation estimates and dismal Wall Street earnings have trimmed 1% rate hike odds.
• A minor improvement in Japan’s core CPI displays a recovery in the demand for Durable Goods.

The USD/JPY pair is marching towards 137.00 as investors are betting over the widening Federal Reserve (Fed)-Bank of Japan (BOJ) policy divergence on Wednesday. The asst is gradually moving towards the critical hurdle of 137.00 after a modest rebound at around 136.00 on Friday.

On Wednesday, the interest rate decision by the Fed is expected to elevate its interest rates to 2.5%. A rate hike announcement by 75 basis points (bps) by Fed chair Jerome Powell to combat the inflation monster may support the greenback. Earlier, expectations were soaring for a 1% rate hike as inventors saw price pressures reaching a double-digit figure. However, a downward shift in long-run inflation expectations to 2.8% vs. June print of 3.1% and a dismal second-quarter earnings show on Wall Street have forced the Fed not to pick up a galloping pace.

Meanwhile, the yen bulls remained upbeat last week after the release of Japan’s Consumer Price Index (CPI). The National CPI was trimmed to 2.4% vs. 2.5% reported earlier. While the core CPI climbed to 1% from the prior release of 0.8%. The BOJ remained worried as oil and food prices were keeping the inflation rate above 2%. Now, a recovery in demand for durable goods is going to delight the BOJ policymakers amid an overall recovery.

In spite of higher core CPI in Japan, expectations of a hawkish commentary from BOJ Governor Haruhiko Kuroda have no relevance. The BOJ will continue with its dovish commentary and will keep flushing money into the economy.