• USD/JPY falls sharply to 155.50 amid soft US Dollar.
• Firm speculation for Fed rate cuts in September keeps the US Dollar on the backfoot.
• The Japanese economy is estimated to have contracted by 0.4% in the first quarter of this year.

The USD/JPY pair drops sharply to 155.50 in Wednesday’s European session. The asset falls sharply as the US Dollar extends its losing spell for the third trading session. The US Dollar Index (DXY) has dropped below 105.00 as investors remain confident that the Federal Reserve (Fed) will start reducing interest rates from September.

Speculation for the Fed to begin lowering borrowing rate from September remains firm despite the United States (US) Producer Price Index (PPI) growing faster than the consensus in April. Investors remain confident over rate cuts as Fed Chair Jerome Powell ruled out expectations of further policy-tightening. However, Powell emphasized keeping interest rates at their current levels for a longer period.

Meanwhile, investors await the US Consumer Price Index (CPI) data for April, which will be published at 12:30. The consumer inflation data will provide a clear picture over the interest rate outlook. Annual headline CPI is forecasted to have softened to 3.4% from 3.5% in March. In the same period, the core inflation that strips off volatile food and energy prices is anticipated to decelerate to 3.6% from the prior reading of 3.8%. Economists expect that monthly headline and core CPI have grown at a slower pace of 0.3% from the prior reading of 0.4%.

The US consumer inflation has remained higher-than-projected in all three months of the first quarter of this year. A continuation of the same could force traders to shift rate cut bets towards the end of the year or to the start of 2025.

On the Tokyo front, investors await Japan’s Q1 Gross Domestic Product (GDP) data, which will be published on Thursday.

Economists expect that the Japanese economy contracted by 0.4% after expanding by 0.1% in the last quarter of 2023. On an annualized basis, the Japanese economy is estimated to have contracted significantly by 1.5%. Weak GDP growth will raise concerns over BoJ’s plan to continue the policy-tightening cycle.