USD/JPY reverses pullback from yearly top near 140.00 on mixed Tokyo inflation, upbeat yields

• USD/JPY bounces off intraday low after retreating from six-month high.
• Tokyo Consumer Price Index eases to 3.2% YoY in May versus 3.9% expected, 3.5% prior.
• Hawkish BoJ signals, upbeat Japan economics lure Yen buyers.
• Risk aversion, strong US data puts a floor under the prices.

USD/JPY pares intraday losses around the 140.00 round figure, bouncing off the daily low, as it jumps back towards the Year-To-Date (YTD) high marked the previous day. That said, the Yen pair picks up bids after Japan’s inflation gauge eased during early Friday.

Tokyo Consumer Price Index (CPI) eased to 3.2% YoY from 3.5% previous readings and 3.9% market forecasts. On the same line is the Tokyo CPI ex Fresh Food while the Tokyo CPI ex Food, Energy edged higher but stays below the market forecasts for the said month.

Given the downbeat Japanese inflation, the Bank of Japan (BoJ) policymakers’ defense of easy money policies remains valid and favors the Yen pair buyers. On Thursday, Bank of Japan (BoJ) Governor Kazuo Ueda said that they could tweak the Yield Curve Control (YCC) strategy if the balance between the benefit and the cost of the policy were to shift, as reported by Reuters.

In addition to the BoJ concerns, strong Treasury bond yields and upbeat US data also underpin the USD/JPY pair’s strength as it remains near the highest levels since November 2022. On Thursday, the second estimation of the US Annualized Gross Domestic Product (GDP) for Q1 2023 was revised up to 1.3% versus 1.0% first forecasts. Further, the Chicago Fed National Activity Index for April improved to 0.07 from -0.37 prior and -0.02 market estimations. On the same line, Kansad Fed Manufacturing Activity improved to -2 for May compared to -21 previous readings and analysts’ estimations of -11. It’s worth noting that the US Pending Home Sales for April improved on YoY but eased on MoM whereas Core Personal Consumption Expenditures also rose to 5.0% during the preliminary readings versus 4.9% prior.

It should be noted that Japan’s economic optimism and looming fears of US debt ceiling expiration are extra catalysts that define the USD/JPY pair’s current status. Japanese Cabinet Office released the monthly assessment report on Thursday and raised the overall economic view for the first time since July 2022 in May. The government report also noted that the economy is 'recovering moderately'.

Against this backdrop, the US Dollar Index (DXY) rose to the highest levels in 10 weeks, to 104.20 at the latest, whereas the US 10-year and two-year Treasury bond yields rose to the early March highs of around 3.82% and 4.54% in that order. That said, Wall Street closed mixed but S&P500 Futures is mildly offered at the latest.

Having witnessed the initial reaction to Japan’s inflation numbers, the USD/JPY sellers may find it difficult to keep the reins amid the market’s risk-off mood and upbeat US data favoring the US Dollar, not to forget the upbeat yields. With this, the updates surrounding the US debt ceiling negotiations and a slew of the US data will be eyed for clear directions.

Technical analysis

Despite the latest pullback, a two-week-old ascending support line and the resistance-turned-support line stretched from mid-December 2022, respectively near 139.55 and 137.70, restrict short-term downside of the USD/JPY pair.