• USD/JPY is displaying a volatility contraction, setting the ground for a decisive move ahead.
• The Fed has cited Average Hourly Earnings as the next trigger for upside inflation risks.
• US Retail Sales are expected to contract and will bolster further softening in inflation data.

The USD/JPY pair is displaying topsy-turvy moves around 135.40 in the Asian session. The asset is cleaning the mess made by Fed policy-induced volatility through volatility contraction, which will provide a path for a decisive move ahead.

The major witnessed a wild gyration in a 134.50-136.00 range after the Federal Reserve (Fed) shifted to a lower rate hike back by a deceleration in the interest rate. Fed chair Jerome Powell announced a 50 basis point (bps) interest rate hike, which pushed interest rates to 4.25-4.50%.

Meanwhile, the US Dollar Index (DXY) has displayed a marginal rebound move to near 103.70. S&P500 futures have attempted a firmer recovery after setting in red on Wednesday. It seems that investors are shrugging off higher interest rate peak projections and are cheering the novel approach of a smaller and slower interest rate hike, portraying a recovery in the risk appetite theme.

Fed chair Jerome Powell has warned investors that the next catalyst, which carries the potential of reversing the inflation rate is the Average Hourly Earnings, which are not slowing down. Continuous increments in earnings will keep retail demand upbeat and won’t incentivize firms for offering goods and services at lower prices.

Going forward, investors will shift their focus toward the release of Thursday’s United States Retail Sales data. The monthly Retail Sales data (Nov) is expected to contract by 0.1% while the prior release was an expansion by 1.3%. A decline in retail demand will bolster further softening in inflation data.

On the Tokyo front, investors are expecting more stimulus packages from the Japanese administration in order to spurt the extent of economic activities. The Bank of Japan (BOJ) is already favoring policy easing approach to accelerate inflation and is expected to continue further till inflation reaches to 2% target confidently.