USD/JPY recovers from 153.60 as US Dollar stabilizes after soft US inflation-induced sell off

• USD/JPY bounces back from 153.60 as US Dollar attempts recovery.
• Investors' conviction over Fed to begin reducing interest rates from September has improved.
• The Japanese economy contracted at a faster pace in the first quarter of this year.

The USD/JPY finds buying interest after falling to the day’s low near 153.60 in Thursday’s European session. The asset recovers as the US Dollar stabilizes after a significant fall due to an expected decline in the United States Consumer Price Index (CPI) data for April, which boosted expectations for the Federal Reserve (Fed) to start lowering interest rates from the September meeting.

On Wednesday, the US Bureau of Labor Statistics (BLS) reported that annual figures for headline and the core CPI declined to 3.4% and 3.6%, respectively as expected. This led to a sharp decline in the US Dollar Index (DXY) to monthly low around 104.00. However, the US Dollar seems stabilizing but further is still uncertain.

The CME Fedwatch tool shows that the probability for interest rates coming down from their current levels in September has improved to 73% from 69% recorded a week ago, exhibiting an increase in investors’ confidence in rate cuts. However, Fed policymakers are not expected to start endorsing rate cuts as a one-time decline in price pressures is insufficient to build conviction that inflation will sustainably decline to the 2% target.

Going forward, investors will focus on the US Initial Jobless Claims data for the week ending May 10. The US Department of Labor is expected to show a decline in number of individuals claiming jobless benefits for the first time to 220K from eight-month high of 231K, for the week ending May 3.

On the Japanese Yen front, weaker-than-expected preliminary Q1 Gross Domestic Product (GDP) data has raised concerns over the Bank of Japan’s plans to extend the policy-tightening cycle. The Japanese economy contracted at a faster pace of 0.5% from the consensus of 0.4%. In the last quarter of 2023, the economy remained stagnant.