USD/JPY sees upside above 137.00 on hawkish Fed bets

• USD/JPY is likely to deliver more gains after surpassing the critical hurdle of 137.00.
• A rate hike announcement by the Fed will escalate the Fed-BOJ policy divergence.
• A significant drop in Walmart earnings and US Consumer Confidence indicate weaker retail demand.

The USD/JPY pair is displaying a subdued performance in the early Tokyo session after a perpendicular upside move on Tuesday. The asset remained in the grip of bulls as the announcement of interest rate decision by the Federal Reserve (Fed) will escalate the Fed-Bank of Japan (BOJ) policy divergence further. Broadly, the asset is extremely strong and is likely to deliver more gains after overstepping the critical hurdle of 137.00.

As per the market consensus, the Fed will paddle up the cost of capital by 75 basis points (bps). The laborious job of Fed policymakers to trim demand by elevating interest rates and to elevate supply for restoration of modest prices without dragging the economy into recession is getting heated now. Retail demand has taken the bullet as the US Consumer Confidence has dropped to lowest since February 2021 to 95.7 and giant retail-chain operator Walmart has reported weak earnings.

Meanwhile, the US dollar index (DXY) has established above the immediate hurdle of 107.00 and is likely to extend gains on hawkish Fed policy. Apart from the Fed policy, the release of the US Durable Goods Orders will remain in focus. The economic data is seen plunging to -0.2% from the prior release of 0.8%. A slippage in the aforementioned economic data indicates that the overall demand in the US economy is currently dominated by higher energy and food bills.

On the Tokyo front, the continuation of an ultra-loose monetary policy by the BOJ will keep the yen bulls in the negative trajectory. No doubt, the weaken yen has resulted into a significant increase in exports and eventually contributing meaningfully into the corporate earnings. But, for a long-term prospective, weaker yen may not be fruitful for the economy.