USD/JPY remains above 134.00, closely watching 134.50 after US CPI

• USD/JPY has trimmed earlier losses and is looking for a test of multi-decade highs hit earlier in the week near 134.50.
• The yen’s strength after a joint statement by the Japanese government and the Bank of Japan on concerns about currency weakness was short-lived.
• As US yields rise on the back of a higher-than-expected US CPI, USD/JPY remains at risk of further gains.

The yen’s earlier strength, which at one point saw the currency rally as much as 0.7% on the day against the US dollar, after the Japanese government and central bank issued a rare joint statement expressing concern due to the recent weakness of the yen, it has turned out to be short-lived. The USD/JPY it is back close to sideways on the day and trading comfortably above the 134.00 level, not many pips below the multi-decade highs it hit near 134.50 earlier in the week.

Higher-than-expected data on US consumer price inflation, which has pushed the year-over-year headline inflation rate to a new four-decade high in May and a smaller-than-expected decline in the YoY from underlying price pressures, have caused the market to recapture some of the Fed’s tightening bets, pushing yields higher in the US USD/JPY, especially following recent comments from the The Bank of Japan, which is doubling down on its policy of negative interest rates and yield curve control, is sensitive to further widening of US-Japan rate spreads.

Although Masato Kanda, Japan’s top foreign exchange diplomat, told the Japanese press on Friday that the government will take necessary steps to prevent disorderly moves in the foreign exchange market, signaling direct intervention in the Forex market (ie yen buying), the USD/JPY pair remains at risk of hitting new multi-decade highs before the week is out. The focus of next week will be the Fed’s monetary policy announcement on Wednesday.

Technical levels