USD/JPY retreats from multi-year high to 135.00 as markets brace for Fed

• USD/JPY stays pressured around intraday low after reversing from the highest levels since 1998.
• Softer yields, upbeat Japan data adds strength to the pullback.
• BOJ vs. Fed play becomes crucial for near-term directions, risk catalysts, US Retail Sales may also entertain traders.

USD/JPY keeps the early Asian session losses as sellers flirt with the intraday low while flashing the biggest daily loss in three weeks. In doing so, the yen pair reverses from the highest levels since 1998 during early Wednesday morning in Europe, around 135.00 by the press time.

The yen pair’s latest weakness could be linked to upbeat Japanese data and a pullback in the US Treasury yields, as well as the market’s preparations for the Federal Open Market Committee (FOMC).

Japan’s Machinery Orders for April jumped 19% YoY versus 5.3% expected and 7.6% prior. The Government report raised hopes of an economic recovery following the data. Elsewhere, the Reuters Tankan sentiment index, a business confidence gauge that strongly correlates with the Bank of Japan’s (BOJ) quarterly Tankan survey, found sentiment among manufacturing and service-sector firms was expected to improve over the next three months, though companies reported pressure from rising costs aggravated by a weaker yen.

On the other hand, the US Dollar Index (DXY) retreats from the highest level since 2002, down 0.20% intraday around 105.20, as the US Treasury yields ease from a multi-year top. That said, the US 10-year Treasury bond yields dropped 5.6 basis points (bps) to 3.43%. In doing so, the benchmark US bond coupons eased from the fresh high since 2011, marked the previous day.

The softer US Producer Price Index (PPI) readings for May allowed the US bond coupons to retreat from the 11-year high and trigger a pullback in the US dollar ahead of the Fed meeting.  That said, the US PPI matched 0.8% MoM forecasts, also easing to 10.8% YoY figures versus 10.9% expected and prior readouts. The PPI ex Food & Energy, known as Core PPI, dropped below 8.6% YoY forecasts to 8.3%.

Above all, the Bank of Japan’s (BOJ) ability to buy up to 2.45tln yen of Japanese Government Bonds (JGBs), as mentioned on Tuesday, seems to favor the USD/JPY sellers. However, fears of the faster/heavier Fed rate also keep the USD/JPY buyers hopeful.

As per the latest readings of the CME’s FedWatch Tool, there is a 99% probability for a 75 bp rate increase during today’s meeting. Comments from the US diplomats, suggesting an indirect push to the Fed also seem to keep the USD/JPY afloat. White House (WH) Economic Adviser Brian Deese and National Economic Council Deputy Director Bharat Ramamurti were among the US diplomats who highlighted the inflation woes and showed readiness to battle the same during their interviews with CNN and Bloomberg respectively.

On a different page, Reuters poll said, "The yen is at risk of weakening further against the dollar for at least the rest of 2022, more than two-thirds of economists polled, underscoring the consequences of the Bank of Japan being the lone major central bank clinging to easy policy."

That said, USD/JPY traders may pay attention to the risk catalysts, namely the covid updates and the US-China tussles, not to forget the Russia-Ukraine tensions, to determine immediate moves. However, major attention will be given to the US Retail Sales for May and the US Federal Reserve’s (Fed) ability to tame inflation and keep the economic growth intact.

Read: Fed Preview: Powell to plunge markets or raise yields, a win-win for the dollar, five scenarios

Technical analysis

A 13-day-old support line near 134.70 restricts immediate USD/JPY downside but the bears remain cautious until the quote stays above April’s peak of 131.25.

Meanwhile, multiple resistances marked during late 1998 could test the pair buyers around 137.60.