USD/JPY steadies above YTD low as US inflation takes centre stage

• USD/JPY trades sideways near 143.00 with a focus on the US inflation data for August.
• The US inflation data will influence market expectations for the Fed interest rate cut path.
• Investors see the BoJ hiking interest rates further in the remainder of the year.

The USD/JPY pair steadies near 143.00 in Tuesday’s European session, holding gains generated after rebounding from the Year-to-date (YTD) low of 141.70 on Monday. The asset is expected to trade sideways as investors have sidelined ahead of the United States (US) Consumer Price Index (CPI) data for August, which will be published on Wednesday.

The market sentiment appears to be cautious as the US inflation data is expected to significantly influence market speculation for the Federal Reserve (Fed) interest rate cut path. S&P 500 futures have posted nominal losses in European trading hours. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, clings to gains near 101.60.

Investors see the US annual headline CPI decelerating to 2.6%, the lowest since March 2021, from 2.9% in July. The core inflation-which excludes volatile food and energy prices- is expected to have grown steadily by 3.2%. The significance of the inflation data has increased as the US Nonfarm Payrolls (NFP) data for August failed to provide a precise case about whether the Fed will start the policy-easing cycle aggressively or gradually.

Soft inflation figures would prompt market expectations for the Fed to cut interest rates by 50 basis points (bps) in the monetary policy meeting next week. The confusion over Fed’s likely interest rate cut size would deepen if the figures remain hot or sticky.

Meanwhile, the overall outlook of the Japanese Yen (JPY) remains firm as the Bank of Japan (BoJ) is expected to tighten its monetary policy further amid persistent inflationary pressures. Traders continue to bet for BoJ’s policy-tightening despite Japan’s Q2 Gross Domestic Product (GDP) data coming in lower than projected. Japan’s annualized GDP unexpectedly grew at a slower pace of 2.9%. Investors forecasted Japan’s economy to have expanded at a faster pace of 3.2% from the former release of 3.1%.