USD/JPY recovers to 156.00 as US Dollar bounces back

• USD/JPY rebounds sharply to 156.00 amid a firm recovery in the US Dollar.
• Fed officials one good inflation data as incapable for unwinding the restrictive policy stance.
• Japan’s weak GDP deepens fears of BoJ’s limited scope for policy-tightening.

The USD/JPY pair extends its recovery to 156.00 in Friday’s European session. The asset strengthens as the US Dollar rebounds strongly after the Federal Reserve (Fed) ruled out expectations of rate cuts despite an expected decline in the United States (US) Consumer Price Index (CPI) data for April.

On Thursday, the communication from Fed policymakers suggested that one-time decline in the consumer price inflation in sufficient to indicate a change in the overall trend. New York Fed Bank President John Williams said he doesn’t see any economic indicator suggesting the need to change the stance of monetary policy now. When asked about the inflation outlook, Williams said, “In the very near term, I don't expect to get that greater confidence that we need to see on inflation progress towards a 2% goal," Reuters reported.

The situation of restrictive interest rate stance by the Fed for a longer period is favorable for the US Dollar and bond yields. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rise to 104.70. 10-year US Treasury yields rise to 4.39%.

Meanwhile, the speculation for the Fed to begin reducing interest rates from the September meeting remains firm. The CME FedWacth tool shows that the probability of interest rates declining from the current levels in September is 68%, which has come down from 73% recorded after the release of the soft inflation data.

On the Japan front, weak Q1 Gross Domestic Product (GDP) data has prompted fresh challenges for the Bank of Japan (BoJ) with their agenda of tightening monetary policy further. The Japanese economy contracted at a higher pace of 0.5% from the estimates of 0.4%.