USD/JPY attempts recovery from 136.60 despite risk-on mood, US CPI hogs limelight

• USD/JPY has witnessed demand near 136.60 as Japan’s GDP contraction weighs on the Japanese yen.
• Investors have preferred to cheer Fed’s rate hike slowdown over recession fears.
• The Fed is expected to hike interest rates by 50 bps in its last monetary policy meeting of CY2022.

The USD/JPY pair has attempted a rebound move around 136.60 in the Tokyo session. The asset was trading sideways earlier but is now aiming to deliver gains despite an upbeat market mood. The US Dollar Index (DXY) is auctioning below the critical resistance of 105.00 and is likely to remain on edge amid a decline in safe-haven’s appeal.

Meanwhile, S&P500 futures are displaying marginal weakness in early Asia, portraying cautiousness ahead of critical triggers. However, the overall sentiment is still bullish and may keep demand solid in the risk-sensitive assets. The 10-year US Treasury yields are holding their gains above 3.48%.

Investors have preferred to cheer an expected slowdown in the interest rate hike pace by the Federal Reserve (Fed) rather than recession fears in the United States due to the hawkish policy outlook. No doubt, the interest rate peak guidance is expected to remain hawkish citing recent development in employment generation and robust demand for the service sector.   

Analysts at Danske Bank see a further hike in interest rates by 50 basis points (bps) and a hawkish message from Fed chair Jerome Powell for CY2023. Therefore, termination in the 75 bps rate hike culture is on cards. Also, the neutral rate is expected at 5.00-5.25%.

Apart from that, US Consumer Price Index (CPI) data will remain in focus. The headline CPI is expected to remain unchanged at 7.7% while the core inflation might inch higher to 6.4%.

On the Tokyo front, consecutive contraction in the Gross Domestic Product (GDP) figures is impacting the Japanese yen. This has triggered the risk of further decline in inflation as a contraction in economic activities indicates a decline in households’ demand, which is critical for spurring inflation. It is highly likely the Bank of Japan (BOJ) will continue to release more stimulus to strengthen economic prospects.