USD/JPY finds intermediate support near 138.50, downside seems favored as US PPI softens

• USD/JPY has found an intermediate cushion near 138.50. More downside is expected as US PPI has softened significantly.
• The monthly headline and core PPI expanded by 0.1% but at a slower pace than the consensus of 0.2%.
• A significant decline in US factory gate prices indicates that household demand has dropped sharply.

The USD/JPY pair has gauged intermediate support near 138.50 in the early European session. The asset has attempted a recovery move after building a base around 138.50, however, more downside seems favored as the United States Producer Price Index (PPI) has softened more than expected.

The monthly headline and core PPI expanded by 0.1% but at a slower pace than expected by the market participants at 0.2%. On an annualized basis, headline prices at factory gates have decelerated dramatically to 0.1% vs. the consensus of 0.4% and the former release of 0.9%. Additionally, core PPI has softened to 2.4% against the estimates of 2.65 and the prior release of 2.8%.

After the soft inflation report, a significant decline in factory gate prices indicates that price pressures are declining broadly. Also, households’ demand has dropped sharply which has forced producers to grip retail prices.

The pace of softening in inflation and the PPI report is going to encourage the Federal Reserve (Fed) to skip the policy-tightening spell for the second time.

Apart from the PPI report, weekly Initial Jobless Claims have also been released for the week ending July 07. The US Department of Labor has reported that first-time claimers were 237K vs. expectations of 250K and the former release of 249K.

S&P500 is expected to open on a bullish note, considering positive gains made in the overnight session. US equities have remained firm as soft inflation has trimmed fears of a recession significantly. The US Dollar Index (DXY) has continued its decline to near 100.15.

On the Japanese Yen front, Japan's top currency diplomat Masato Kanda cited that deflationary norms may be changing. Kanda added the government is closely watching FX market moves.