USD/JPY appreciates toward 143.00 as traders expect the Fed to deliver a smaller rate cut

• USD/JPY gains ground due to rising odds of a smaller rate cut by the Fed in September.
• BoJ board member Naoki Tamura stated that there is no predetermined plan regarding the pace of future rate hikes.
• CME FedWatch Tool suggests the odds of a 50 bps rate cut by the Fed have decreased to 15.0%.

USD/JPY breaks its two-day losing streak, trading around 142.90 during the European hours on Thursday. The Japanese Yen (JPY) remains subdued following the remarks from the Bank of Japan (BoJ) board member Naoki Tamura.

BoJ board member Tamura stated that there is "no preset idea on the pace of further rate hikes." Unlike in the US and Europe, Japan's rate hikes are expected to proceed more gradually. The exact timing for when short-term rates in Japan might reach 1% will depend on the economic and price conditions at that time.

Read the full article: BoJ’s Tamura doesn't have a preset idea on the pace of further rate hikes

The upside of the USD/JPY pair could be attributed to rising expectations of a smaller interest rate cut by the Fed in September. August’s US Consumer Price Index (CPI) data showed that headline inflation dropped to a three-year low. This development has heightened the likelihood that the Federal Reserve (Fed) will begin its easing cycle with a 25-basis points interest rate cut in September.

The US Consumer Price Index dipped to 2.5% year-on-year in August, from the previous reading of 2.9%. The index has fallen short of the expected 2.6% reading. Meanwhile, headline CPI stood at 0.2% MoM. Core CPI ex Food & Energy, remained unchanged at 3.2% YoY. On a monthly basis, core CPI rose to 0.3% from the previous 0.2% reading.

According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Federal Reserve at its September meeting. The likelihood of a 50 bps rate cut has sharply decreased to 15.0%, down from 44.0% a week ago.