The USD/JPY pair fell to around 147.10 during the early Asian session on Tuesday, reflecting a modest decline in the US Dollar (USD). This drop is attributed to ongoing expectations that the US Federal Reserve (Fed) will cut interest rates in September.
Traders have scaled back their expectations of a significant rate cut. According to the CME’s FedWatch Tool, the likelihood of a 50 basis point (bps) rate cut on September 18 has decreased to less than 50%, down from 70% last week. Despite this, the market still anticipates a 100% probability of at least a 25 bps cut at the Fed’s September meeting.
The upcoming US Producer Price Index (PPI) report, scheduled for release on Tuesday, could provide further insights into the Fed’s future rate decisions. The PPI is projected to ease to 2.3% year-on-year in July from 2.6% previously, while the Core PPI is expected to decline to 2.7% year-on-year from 3.0%. A hotter-than-expected PPI could temper rate cut expectations and potentially support the USD.
Conversely, geopolitical tensions in the Middle East are likely to boost safe-haven flows into the Japanese Yen (JPY). Reports indicate that Israeli intelligence suspects Iran may be planning a direct attack on Israel in response to the recent assassination of Hamas leader Ismail Haniyeh in Tehran.
In Japan, the Producer Price Index (PPI) for July rose 3.0% year-on-year, matching market expectations and up from 2.9% previously. On a monthly basis, the PPI increased by 0.3%, compared to the prior 0.2%.
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