USD/JPY prods Yen bears near 139.50 as yields retreat, risk dwindles ahead of US inflation

• USD/JPY picks up bids to pare intraday losses, the first in three days.
• Downbeat Japan data defends BoJ doves but Fed concerns prod Yen pair’s rebound.
• US inflation needs to confirm market’s rate bias for June FOMC and to favor USD/JPY bears.
• BoJ Officials have ruled out hopes of any policy change but markets stay doubtful.

USD/JPY bounces off intraday low as it consolidates the first daily loss in three as Tokyo opens for Tuesday’s trading. Even so, the Yen pair remains mildly offered on a day around 139.55 by the press time.

That said, the Yen pair’s latest run-up could be linked to the downbeat Japan data that justifies the Bank of Japan (BoJ) Officials’ dovish bias. Earlier in the day, Japan’s Business Sentiment Index (BSI) Large Manufacturing Conditions Index for the second quarter (Q2) dropped to -0.4 versus 0.1 expected and -10.5 prior.

On Monday, Japan’s Producer Price Index (PPI) for May dropped for the fifth consecutive month to 5.1% YoY from 5.8% previous readings and 5.5% market forecasts. That said, monthly figures also disappointed Yen traders with -0.7% MoM outcome, versus -0.2% expected and 0.2% prior.

It should be noted that Bank of Japan (BoJ) policymaker Masazumi Wakatabe said in a Bloomberg TV interview early Monday, “It’s still too early to call that this inflation has been sustainable and stable.” That said, BoJ’s Wakatabe clearly ruled out options of any move by the Japanese central bank in the June meeting as he guessed that at the June meeting, there would be nothing.

Elsewhere, the US Dollar Index (DXY) struggles to defend the two-day winning streak while fading the week-start rebound from the lowest levels since May 23 as market players place dovish bets on the US Federal Reserve (Fed) ahead of Wednesday’s Federal Open Market Committee (FOMC). Even so, the increase in the bets favoring the Federal Reserve’s (Fed) 0.25% rate hike in July prod the sentiment and put a floor under the US Dollar, as well as the USD/JPY price. It should be noted that the CME’s FedWatch Tool suggests nearly limited scope for the US central bank to act.

A trade dispute is developing after the US expands its ban on imports from Xinjiang, which in turn weigh on the risk profile and the USD/JPY price. China vows to protect China firms against any US sanctions, per Reuters. Recently, Bloomberg released prepared remarks of US Treasury Secretary Janet Yellen’s scheduled Testimony in front of the House Financial Services Committee as she said that the International Monetary Fund (IMF) and the World Bank (WB) serve as important counterweights to non-transparent, unsustainable lending from others, like China.

It should be noted that the cautious mood ahead of the US inflation data and the looming $3.0 trillion worth of bond issuance from the US Treasury Department, due to the debt-ceiling deal, also exert downside pressure on the sentiment and the USD/JPY price. Amid these plays, the US 10-year and two-year Treasury bond yields keep the late Monday’s retreat near 3.73% and 4.58% at the latest.

Moving on, the bond market moves and risk catalysts will be important to determine the short-term moves of the USD/JPY pair. That said, the US Consumer Price Index (CPI) figures for May will be in the spotlight as the Fed decision looms on Wednesday. It’s worth noting that the market forecasts of witnessing no change in the Core CPI MoM figure of 0.4% gain major attention as softer figures could push back the July rate hike concerns and may not allow the Fed to sound hawkish. The same will weigh on the US Dollar and can please the Yen pair bears.

Also read: US Inflation Preview: Why the US Dollar is more likely to fall than rise, three scenarios

Technical analysis

The RSI (14) line’s retreat joins the increasing strength of the bearish MACD signals to challenge the USD/JPY buyers within a two-week-old symmetrical triangle, currently between 139.90 and 138.85.