- A combination of factors triggered some profit taking around USD/JPY on Tuesday.
- Intervention speculations coupled with the risk-off mood provided support for the yen.
- The decline in US bond yields acted as a headwind against the dollar and put pressure on it.
- Policy divergence between the Fed and the Bank of Japan capped losses ahead of Wednesday’s US CPI.
The pair USD/JPY witnessed some profit-taking on Tuesday and eroded some of the previous day’s strong gains to its highest level since September 1998. The pullback dragged the pair around 136.50 in the American session and was aided by a modest pullback from the dollar from two-decade highs.
Japanese Finance Minister Shunichi Suzuki expressed concern over the yen’s recent sharp decline and said he would take appropriate action if necessary. Apart from this, the prevailing risk aversion environment, represented by prolonged selling in equity markets amid fears of a potential global recession, fueled some safe haven flows into the Japanese yen. This, in turn, led the bulls to take some profits and put downward pressure on the USD/JPY pair.
The flight to safety was reinforced by a further decline in US Treasury yields, which translated into a narrowing of the US-Japan rate spread and provided additional support for the yen. . Indeed, the benchmark 10-year US government bond yield slipped further below the 3.0% threshold and did not help the US dollar retain modest intraday gains to hit a new two-decade high. This contributed to the intraday corrective pullback in the USD/JPY pair.
However, the fall seems limited, at least for the moment, amid the divergence of the monetary policy adopted by the Bank of Japan and the Federal Reserve. Indeed, Bank of Japan Governor Haruhiko Kuroda reiterated on Monday that the central bank remains ready to take further monetary easing if necessary. In contrast, the FOMC minutes released last week reaffirmed market bets that the US central bank would maintain its aggressive policy tightening cycle to curb rising inflation.
Policymakers signaled that another rate hike of 50 or 75 basis points is likely at the next FOMC meeting in July and stressed the need to fight inflation, even if it translates into an economic slowdown. Therefore, the market’s attention will continue to be focused on the latest US consumer inflation figures, to be released on Wednesday. The US CPI report will play a key role in influencing short-term dollar price dynamics and help investors determine the next leg of a directional move for the USD/JPY pair.
Meanwhile, US bond yields will boost dollar demand and provide some lift to the USD/JPY pair amid the absence of any market-relevant economic releases out of the US on Tuesday. On the other hand, traders will take as a reference the risk sentiment of the market in general to take advantage of the short-term opportunities around the pair.
Technical levels
Source: Fx Street
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