USD/JPY grinds near yearly top surrounding 139.50 amid US default woes, upbeat yields

• USD/JPY retreats from refresh six-month high despite broad US Dollar strength, sturdy yields.
• No major progress on negotiations to avoid US debt ceiling expiry alerts global rating agencies for the US’ AAA status.
• Reuters cites Japanese firms’ worries over falling birth rate, FOMC Minutes show policymakers’ division.
• Multiple second-tier US data to entertain Yen pair traders but risk catalysts are the key.

USD/JPY remains on the front foot, despite the latest pullback from the Year-To-Date (YTD) high of near 139.50 as Tokyo opens for Thursday’s trading. In doing so, the Yen pair justifies the market’s rush towards risk safety that propels the US Dollar and the Treasury bond yields. Additionally, fears surrounding the fall in Japan’s birth rate and its economic consequences also weigh on the Japanese Yen (JPY) and fuel the pair prices.

Market sentiment worsens as US policymakers struggle to break the deadlock in the US debt ceiling extension talks despite nearing the anticipated expiry of early June. Recently, US House Speaker Kevin McCarthy said that they are sending their negotiators to the White House to try and finish up debt-limit talks. However, reports took rounds that the US House members will go back to their homes after Thursday, to cheer the long weekend, before resuming the debt ceiling negotiations, which in turn escalates the fears of no deal before late May.

As a result, global rating agencies like Fitch and Moody’s turn cautious about the US credit rating status. Late on Wednesday, Moody’s warned about the US outlook change while Fitch put US’ AAA on Rating Watch Negative status.

It should be noted that the Minutes of the latest Federal Open Market Committee (FOMC) Meeting suggested that the policymakers aren’t on the same table as some suggest it is appropriate to hike the rates while others advocate for a policy pivot.

At home, Reuters cites a survey conducted on more than 500 Japanese firms to highlight the fears of a falling birth rate in the Asian major, which in turn could push the government and the Bank of Japan (BoJ) to push for more easy-money measures. “More than nine out of 10 Japanese firms feel a sense of crisis about the country's accelerating birthrate decline, with few hopeful that Prime Minister Fumio Kishida's government can arrest the fall,” according to a Reuters monthly poll.

Against this backdrop, S&P500 Futures print mild gains despite downbeat Wall Street performance whereas the yields seesaw near the highest levels since mid-March. That said, the US 10-year and two-year Treasury bond yields make rounds to 3.74% and 4.38% by the press time.

Looking ahead, USD/JPY pair traders should keep their eyes on the risk catalysts for clear directions. Additionally important will be the US weekly Jobless Claims, the second reading of the Q1 GDP estimate, the Chicago Fed National Activity Index and Pending Home Sales.

Technical analysis

USD/JPY bulls need validation from the late November swing high of around 139.90, as well as from the 140.00 round figure, to keep the reins.