USD/JPY aims to recapture 137.00 as investors see Fed’s terminal rate above 5%

• USD/JPY is looking to reclaim 137.00 as the risk profile sours ahead of Fed’s policy.
• The Fed is expected to hike interest rates by 50 bps and terminal rate guidance above 5%.
• The headline US inflation is seen unchanged at 7.7% and core inflation is higher at 6.4% annually.

The USD/JPY pair has picked strength after remaining sideways around 136.50 in the Tokyo session. The asset is aiming to hit the immediate resistance of 137.00 as the market participants have turned cautious ahead of the interest rate decision by the Federal Reserve (Fed).

Meanwhile, the US Dollar Index (DXY) has shown strength at open and has crossed the round-level resistance of 105.00 firmly. Appeal for safe-haven has improved as the market mood is turning risk-averse ahead of the Fed’s monetary policy and the release of the United States Consumer Price Index (CPI) data.

S&P500 futures have resumed their precautionary selling as a further rate hike by the Fed will propel recession signals. While the 10-year US Treasury yields are marching towards 3.60% on expectations of further policy tightening.

A surprise decline in October’s inflation report and the expected release of November’s Producer Price Index (PPI) has cleared that Fed chair Jerome Powell will look for a slowdown in the interest rate hike pace. Rabobank analysts said they expect the US central bank to hike the policy rate by 50 basis points (bps) and see policymakers revising the terminal rate projection to the neighborhood of 5%.

Apart from that, November’s inflation report will keep the risk-perceived assets on the tenterhooks. As per the projections, the headline CPI is seen unchanged at 7.7% on an annual basis. While the core inflation that excludes oil and food prices is seen marginally higher at 6.4%.

On the Japanese yen front, Reuters reported Bank of Japan (BOJ) board member Hajime Takata said in an interview with the Nikkei newspaper published on Saturday that Japan's economy is not yet in a phase where the central bank can end yield curve control. He further added that there were some positive signs in corporate capital expenditure and wages.