USD/JPY slips below 145.00 amid US dollar weakness

• USD/JPY slips below 145.00 as the US dollar remains on the back foot.
• Traders remain divided on the likely size of the Fed’s September rate cuts.
• Investors are skeptical about how much inflation will rise in Japan this year.

USD/JPY is down near 144.70 in the European session on Tuesday. The asset fell as the US dollar (USD) remains on the back foot as market participants appear confident that the Federal Reserve (Fed) will begin cutting interest rates at its September meeting. The US Dollar Index (DXY), which tracks the greenback against six major currencies, underperformed below 101.00.

Investors’ risk appetite decreased as tensions between Iran and Israel in the Middle East escalated. S&P 500 futures sell gains in Asian trading hours. While broader market sentiment remains upbeat amid confidence that the Fed will pivot to policy normalization in September.

Although the Fed appears certain to cut interest rates in September, traders remain divided on the likely size of rate cuts, given that recession fears in the United States (US) have eased significantly. The CME FedWatch tool shows that the probability of a 50 basis point (bps) interest rate cut is 28.5%.

For fresh interest rate guidance, investors await the July core US personal consumption expenditure (PCE) price index data due on Friday. Annual core PCE is estimated to have grown at a faster pace of 2.7% from 2.6% in June, with the monthly numbers rising steadily by 0.2%. Signs that price pressures remain persistent would hurt expectations of further interest rate cuts.

Meanwhile, the Japanese yen (JPY) is outperforming the US dollar on the latter’s weakness, but is underperforming its peers. Signs of easing pressures on prices in Japan that remain sticky raised doubts about the scope of the Bank of Japan’s policy tightening. Japan’s corporate services price index, a key measure of producer inflation, fell 2.8 percent in July from estimates of 2.9 percent and June’s reading of 3 percent. However, BoJ Governor Kazuo Ueda said last week that further interest rate hikes were needed.