Title: USD/JPY surpasses 135.50 as DXY recovers, Fed’s pre-anxiety hit market mood

Jul 26, 2022 12:07:28 PM

By analysiswatch

The USD/JPY pair has shown a significant rebound after hitting a low of 136.30 in the Asian session.

The asset has broken through the crucial 135.50-point threshold and is heading towards Monday's high of 136.80.

Market sentiment is expected to turn gloomier as investors usually get nervous ahead of the Federal Reserve's (Fed) decision on interest rates.

If the Fed announces a rate hike, USD/JPY is likely to become the main victim as the policy divergence between the Fed and the Bank of Japan (BOJ) is further exacerbated. It cannot be denied that the possibility of a 1% rate hike is currently unrealistic, as the US economy is likely to face a recession in the future.

However, price pressures remain in the US economy, and the Fed will announce a 75 basis point (bps) rate hike.

Although the BOJ is determined to drain liquidity from the economy as it has been fragile in the post-pandemic period and has not yet returned to pre-pandemic levels, this will exacerbate the policy divergence between the Fed and the BOJ and may further strengthen the pair.

In addition to Fed policy, investors' attention will remain on the US durable goods orders data to be released on Wednesday.

The economic data is expected to come in at -0.2%, down from the 0.8% previously published. This points to a severe drop in aggregate demand as retail sales remained higher due to higher energy bills and more expensive food products.