USD/JPY recovers modestly from 140.00 as Fed policy comes into picture

• USD/JPY has displayed a mild recovery from 140.00 ahead of the Fed’s policy.
• Soft US inflation has provided Fed policymakers the luxury of keeping interest rates steady.
• S&P500 futures are choppy after a positive Tuesday as investors have turned cautious ahead of Fed policy.

The USD/JPY pair has shown a modest recovery from the crucial support of 140.00 in the early European session. The asset has majorly remained inside the woods as investors are awaiting the announcement of the interest rate decision by the Federal Reserve (Fed), which will be announced in the late New York session.

S&P500 futures are choppy after a positive Tuesday as investors have turned cautious ahead of Fed policy. US equities were decently bought on Tuesday after inflation data for May softened more than anticipated.

Monthly headline United States inflation has reported a slight pace of 0.1% vs. the estimates of 0.2% and the former pace of 0.4%. Also, annualized headline Consumer Price Index (CPI) has softened to 4.0% while the street was anticipating a decline to 4.1% from the former release of 4.9%. The impact of lower gasoline prices is clearly visible in the headline inflation.

In addition, monthly and annualized core CPI that strips off the impact of oil and food prices maintained the pace of 0.4% and 5.3% respectively as expected.

The street was keenly looking forward for the inflation data as America’s labor market conditions have started easing and factory activities are consistently contracting. And, now decelerated inflationary pressures would allow Fed chair Jerome Powell for keeping the interest rate policy neutral this time.

Analysts at JP Morgan Asset Management expect the Fed to leave the federal funds rate unchanged although both the post-meeting statement and the dot plot will likely emphasize that inaction this week should be considered “skipping a rate hike” rather than putting an end to monetary tightening.”

Apart from the Fed’s policy, the interest rate decision by the Bank of Japan (BoJ) will also remain in the spotlight. Economists at OCBC Bank expect the Friday Monetary Policy Committee (MPC) (16th Jun) may be too soon to expect any policy shift. Nevertheless, we are still in favor of BoJ policy normalization amid broadening inflationary pressures and wage growth seen in Japan.