USD/JPY remains capped below 145.50 amid prospect of US economic slowdown

• USD/JPY hovers around 145.40 in Tuesday’s early Asian session, up 0.83% on the day. 
• A series of downbeat US economic data raises concerns about the US economic downturn.
• An unwinding of Yen carry trades weighs on the pair. 

The USD/JPY pair recovers some lost ground near 145.40 after falling to the lowest level since January 2 around 141.68 during the early Asian session on Tuesday. The sell-off of the Greenback is triggered by fears of the US recession and expectations of deeper rate cuts by the Federal Reserve (Fed). 

Friday’s US employment data showed that the Unemployment Rate rose in July, sparking the likelihood that the US economy is heading into a recession. The markets expect the Fed to cut its interest rate by 50 basis points (bps) in both September and November and another quarter-point cut in December. 

Fed fund futures indicated investors priced in a near 99% possibility of a 50 bps cut in the September meeting, according to LSEG data. The expectation of more aggressive rate cuts from the Fed exerts some selling pressure on the US Dollar (USD) across the board.

Chicago Fed President Austan Goolsbee said on Monday that the Fed would respond if economic or financial conditions deteriorated. Meanwhile, San Francisco Fed President Mary Daly stated that the central bank will monitor if the next job market report reflects the same dynamic or reverses, adding that the Fed is prepared to act as they get more information.

On the other hand, the Japanese Yen (JPY) gains momentum as traders unwind carry trades. Furthermore, the expectation that the Bank of Japan (BoJ) will further tighten monetary policy after raising rates last week might boost the JPY in the near term.