USD/JPY anticipates a significant move following Fed-inspired volatility; US Retail Sales are anticipated

During the Asian session, the USD/JPY pair is fluctuating erratically near 135.40. By reducing volatility, the asset is cleaning up the mess caused by Fed policy-induced volatility, paving the way for a decisive move in the future.

The major currency fluctuated wildly between 134.50-136.00 as the Federal Reserve (Fed) changed to a lesser rate hike in response to an interest rate deceleration. Jerome Powell, chairman of the Federal Reserve, announced a 50 basis point (bps) interest rate increase, which raised rates to 4.25-4.50%.

In the meantime, the US Dollar Index (DXY) has shown a slight bounce to about 103.70. After beginning Wednesday in the red, S&P500 futures have attempted a stronger recovery. It appears that investors are disregarding estimates of higher interest rate peaks and are applauding the unique approach of a smaller and slower interest rate increase, indicating a resurgence in risk appetite.

Fed Chair Jerome Powell has warned investors that Average Hourly Earnings, which are not decelerating, are the next catalyst with the ability to reverse the inflation rate. Continual increases in earnings will keep retail demand buoyant and will not push businesses to provide cheaper prices.

Going forward, investors will shift their attention to the release of U.S. Retail Sales data on Thursday. The monthly Retail Sales data (Nov) is anticipated to decrease by 0.1% compared to the prior reading of 1.3% growth. A drop in retail demand will contribute to additional inflation data softening.

On the Tokyo front, investors anticipate further economic stimulus packages from the Japanese government in order to stimulate economic activity. The Bank of Japan (BOJ) already favors a policy easing approach to accelerate inflation, and this is anticipated to continue until inflation meets its objective of 2% with confidence.