• USD/JPY falls below 145.00 as the US Dollar remains on the backfoot.
• Traders remain divided over the likely size of the Fed’s September interest rate cuts.
• Investors doubt how much inflation in Japan will pick up this year.

The USD/JPY pair falls to near 144.70 in Tuesday’s European session. The asset drops as the US Dollar (USD) remains on the backfoot as market participants appear to be certain that the Federal Reserve (Fed) will start reducing interest rates from the September meeting. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, exhibits a subdued performance below 101.00.

Investors’ risk-appetite has diminished as tensions between Iran and Israel in the Middle East have escalated. S&P 500 futures surrender gains posted in Asian trading hours. While the broader market sentiment remains cheerful amid confidence that the Fed will pivot to policy-normalization in September.

Though the Fed seems certain to cut interest rates in September, traders remain split over the likely size of rate cuts, given that United States (US) recession fears have eased significantly. The CME FedWatch tool shows that the likelihood of a 50-basis point (bps) interest rate reduction is 28.5%.

For fresh interest rate guidance, investors await the US core Personal Consumption Expenditure Price Index (PCE) data for July, which will be published on Friday. The annual core PCE is estimated to have grown at a higher pace of 2.7% from 2.6% in June, with monthly figures growing steadily by 0.2%. Signs of price pressures remaining persistent would weigh on expectations of bigger interest rate cuts.