USD/JPY falls back from 139.00 as soft US CPI assures only one rate hike by Fed this year

• USD/JPY has retreated from 138.83 amid sheer weakness in the US Dollar Index.
• S&P500 futures have added significant gains, portraying a cheerful market mood.
• The monthly headline and core PPI are expected to show a pace of 0.2%.

The USD/JPY pair has retreated after a short-lived pullback to near 138.83 in the European session. The asset has resumed its downside journey as soft inflationary pressures in the United States have provided assurance that the Federal Reserve (Fed) will come out with only one more interest rate hike by the year-end.

S&P500 futures have added significant gains in London, portraying a cheerful market mood. US equities could face some pressure ahead of second-quarter corporate earnings data. Overall corporate earnings could remain volatile due to higher interest rates by the Fed and tight credit conditions by commercial banks.

The US Dollar Index (DXY) has printed a fresh annual low at 100.34 as hawkish commentaries from Fed policymakers are failing to offset the impact of June’s soft Consumer Price Index (CPI) report. Minneapolis Fed Bank President Neel Kashkari cited that policy rates are needed to raise further and supervisors must ensure that banks are prepared to run new high-inflation stress tests to identify at-risk banks and size individual capital shortfalls."

Going forward, investors will focus on the Producer Price Index (PPI) (June) data, which will release at 12:30 GMT. The monthly headline and core PPI are expected to show a pace of 0.2%. Annual headline PPI is likely to decelerate to 0.4% vs. the former release of 1.1%. Sheer softening of prices of goods and services at factory gates would cool down inflationary pressures. Also, a decline in PPI would convey that the overall demand is in a declining stage.

On the Tokyo front, rising expectations of a tweak in the Yield Curve Control (YCC) by the Bank of Japan (BoJ) have provided support to the Japanese Yen. The contribution of higher demand in inflationary pressures is rising due to higher wages, which has stemmed chances of communication of shift in the ultra-dovish policy stance.