USD/JPY rebounds from 136.50 as Tokyo Inflation softens heavily, US Services PMI eyed

• USD/JPY has picked strength near 136.50 as Tokyo Inflation has softened amid lower energy and food prices.
• Speculation for the Japanese Yen might remain elevated as BoJ Ueda could abandon or phase out YCC.
• Fed Bostic but has left room opened for more hawkish rate outlook if data comes in stronger.

The USD/JPY pair has witnessed buying interest after dropping to near 136.50 in the Asian session. The asset has picked strength as the Statistics Bureau of Japan has conveyed that Tokyo Consumer Price Index (CPI) softened heavily in February.

The annual headline CPI has dropped to 3.4% from the consensus of 4.1% and the prior release of 4.4%. Contrary to that, the core CPI that excludes the impact of energy and food prices have improved to 3.2% from 3.1% as expected and the former release of 3.0%. It seems like the inflationary pressures have been exceptionally battered by the recent fall in food and energy prices.

A decline in headline Tokyo inflation indicates that the impact of higher energy and food prices has started fading now, therefore, it could be considered that Tokyo inflation has peaked for now.

Reuters reported that “The pace of inflation slowed due in part to the government's energy subsidies to ease the pain on households from soaring electricity bills.”

It is worth noting that the novel Bank of Japan (BoJ) leadership has been favoring current monetary policy, which is expansionary in nature, as inflation is coming from international forces and not from domestic demand.

Speculation for the Japanese Yen might remain elevated as BoJ Governor Nominee Kazuo Ueda could abandon or phase out Yield Curve Control (YCC).

Meanwhile, S&P500 futures have incurred some losses in the Asian session after a bullish Thursday, indicating caution in the risk-on mood. The US Dollar Index (DXY) is struggling to shift its auction above 105.00. The upside for the US dollar looks favored as Federal Reserve (Fed) policymakers are favoring more rates from the central bank to scale down inflation.

Atlanta Fed Bank President Raphael Bostic said on Thursday that the central bank could be in a position to pause the current tightening cycle by mid to late summer. He favors a 25 basis points rate hike in March but has left room opened for more hawkish rate outlook if inflation and labor market data come in stronger.

On Friday, a power-pack action is expected from the US Dollar as the United States Institute of Supply Management (ISM) will report the Services PMI (Feb) data. The economic data is seen lower at 54.5 from the former release of 55.2. The New Orders Index which conveys the forward demand is expected to decline to 58.5 from the prior figure of 60.4.