USD/JPY holds above 145.00 despite weaker US Dollar

• USD/JPY snaps a two-day losing streak near 145.00 on Monday.
• The downbeat US PPI has triggered the possibility that the Federal Reserve (Fed) will start cutting interest rates this year.
• Japan's two-year yield has declined back under zero for the first time since July 2023.

The USD/JPY pair gained traction above the 145.00 mark during the early Asian session on Monday. The pair rebounds despite the decline of the US Dollar (USD). The market is likely to have a quiet session amid the US bank holiday. At press time, USD/JPY is trading at 145.06, up 0.12% for the day.

The US Producer Price Index (PPI) unexpectedly fell in December, raising the possibility that the Federal Reserve (Fed) would start cutting interest rates this year. The market has priced in 86% odds of a rate cut by March, with the overall 2024 easing cycle priced at around 166 basis points (bps), compared to 75 bps projected by the Fed dot plot. This, in turn, might cap the upside of the Greenback and act as a headwind for the USD/JPY pair.

Japan's two-year yield has dropped back under zero for the first time since July 2023. On Friday, the report said the Bank of Japan (BOJ) is likely to cut its core inflation forecast for the fiscal year 2024 (currently 2.8%) amid the recent decline in oil prices. Additionally, the BOJ is expected to maintain its projection that trend inflation will stay near its 2% target in the coming years, despite global economic uncertainty and lacklustre spending. The projection will be part of the bank's quarterly outlook report due at its next rate review on January 22–23. The BoJ board is widely expected to keep ultra-loose policy settings unchanged.

Looking ahead, the Japanese Machine Tool Orders are due on Monday. However, this low-tier data might not impact the market. Later this week, the Japanese Producer Price Index and the US NY Empire State Manufacturing Index will be released on Tuesday. The US Retail Sales will be due on Wednesday. Traders will take cues from these figures and find trading opportunities around the USD/JPY pair.