• USD/JPY has shown a solid recovery above 138.60 despite higher-than-projected Japan inflation.
• Japan’s National headline CPI jumped to 3.5% while core CPI accelerated to 4.1%.
• Market sentiment is quite upbeat amid optimism for US debt-ceiling raise.

The USD/JPY pair has rebounded firmly to near 138.68 as the Statistics Bureau of Japan has reported higher-than-anticipated inflation numbers (April). National headline Consumer Price Index (CPI) jumped to 3.5% from the prior release of 3.2% while the street was anticipating a deceleration to 2.5%. Core CPI that excludes food and energy prices accelerated to 4.1% vs. the consensus of 3.4% and the former release of 3.8%.

Despite a jump in Japan’s inflation, the Bank of Japan (BoJ) would favor a continuation of ultra-dovish monetary policy to keep inflation steadily above 2% for a longer period.

Earlier this week, Japan’s Gross Domestic Product (GDP) showed a decent rise in Q1 numbers. Preliminary Q1 GDP accelerated by 0.4% vs. the estimates of 0.1%. In the last quarter, the GDP growth remained stagnant. Japan’s Economy Minister Shigeyuki Goto cited “Economy likely to continue moderate pickup ahead due to improving sentiment, wage hikes and strong corporate appetite for investment.

Meanwhile, S&P500 futures have continued their two-day winning performance in the Asian session, portraying a strong risk appetite of the market participants. The rationale behind the positive market sentiment is the optimism for the US debt-ceiling raise as related parties have admitted that there is no alternative to escalating the US borrowing cap to avoid a default by the US Treasury in addressing obligated payments.

The US Dollar Index (DXY) is struggling in extending its rally further above 103.63, however, the upside seems favored as investors are anticipating that more liquidity flush into the United States economy through an increase in the US borrowing limit could cause a rebound in inflation and might force the Federal Reserve (Fed) to raise interest rates further.