USD/JPY finds intermediate support near 138.50, the downside looks favored after US PPI.

• USD/JPY has found intermediate support near 138.50. Further declines are expected as the US PPI has softened significantly.
• Headline and core monthly PPI rose 0.1%, but at a slower pace than the consensus of 0.2%.
• The significant decline in ex-factory prices in the US indicates that demand from homes has plummeted.

The USD/JPY pair has gauged intermediate support near 138.50 early in the European session. The pair has attempted a recovery move after building a base around 138.50, however further downside looks favored as the US Producer Price Index (PPI) has softened more than expected.

The headline and underlying monthly PPI grew by 0.1%, but at a slower pace than expected by market participants, who placed it at 0.2%. In annualized terms, headline ex-factory prices have slowed sharply to 0.1%, versus consensus of 0.4% and previous release of 0.9%. Additionally, the core PPI has softened to 2.4% versus estimates of 2.65 and the previous release of 2.8%.

Following the soft inflation report, the significant decline in ex-factory prices indicates that price pressures are easing overall. In addition, household demand has fallen sharply, forcing producers to cut retail prices.

The pace of inflation smoothing and the PPI report will encourage the Federal Reserve (Fed) to skip a second monetary policy tightening.

In addition to the IPP report, weekly initial jobless claims have also been reported for the week ending July 7. The US Department of Labor has reported that the first claims were 237,000 versus expectations of 250,000 and the previous release of 249,000.

The S&P 500 is expected to open higher, taking into account the positive gains from the overnight session. US stocks have held firm as soft inflation has cut recession fears significantly. The Dollar Index (DXY) has continued its slide to approach 100.15.

As for the Japanese yen, Masato Kanda, Japan’s top currency diplomat, said the deflationary rules may be changing. Kanda added that the government closely follows the movements of the foreign exchange market.