USD/JPY retreats from multi-week high, slides back below mid-115.00s post-US data

• USD/JPY witnessed some profit-taking from a near three-week high touched earlier this Friday.
• The USD retreated from the highest level since July 2020 after the release of the PCE Price Index.
• The risk-off mood benefitted the safe-haven JPY and further contributed to the intraday decline.

The USD/JPY pair surrendered its intraday gains to a near three-week high and retreated back below mid-115.00s, or the lower end of its daily trading range during the early North American session.

The pair build on its solid rebound from a two-month low, around the 113.45 region touched earlier this week and gained some follow-through traction on Friday. The momentum was sponsored by the sustained US dollar buying, bolstered by expectations that the Fed will tighten its monetary policy at a faster pace than anticipated to contain stubbornly high inflation.

In fact, the markets have started pricing in the possibility of five quarter-point rate hikes by the end of 2022 and also expect that the first hike in March could be 50 basis points. The bets were reinforced by Friday's data, showing that the Fed's preferred inflation gauge – Core PCE Price Index – rose 0.5% MoM in December and the yearly rate climbed to 4.9% from 4.7%.

The USD, however, witnessed some profit-taking from the highest level since July 2020 touched earlier this Friday. On the other hand, the prevalent risk-off mood drove some haven flows towards the Japanese yen. The combination of factors prompted some long-unwinding around the USD/JPY pair led to an intraday pullback of over 50 pips from the 115.65-115-70 area.

That said, the Fed's more hawkish stance, along with elevated US Treasury bond yields should continue to act as a tailwind for the greenback. This, along with the recent widening of the US-Japanese bond yield spread, should help limit any meaningful corrective slide for the USD/JPY pair, rather attract some dip-buying at lower levels.

Hence, it will be prudent to wait for a strong follow-through selling before confirming that the post-FOMC rally has run out of steam and placing any bearish bets around the USD/JPY pair. Nevertheless, the pair remains on track to post strong weekly gains, snapping two successive weeks of the losing streak.

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