USD/JPY retreats towards 130.00 on softer yields, focus on inflation

• USD/JPY extends the previous day’s pullback from 20-year high.
• US Treasury yields drop further amid mixed Fedspeak, softer inflation expectations.
• Headlines from China, Japan also underpins corrective pullback of JPY.
• Risk catalysts may entertain traders ahead of Wednesday’s US inflation data.

USD/JPY remains mostly steady on a day around 130.30 as it keeps the pullback from the multi-year high, flashed on Monday. The yen pair also stays beyond the intraday low during early Tuesday morning in Europe as traders take a breather following the previous day’s heavy volatility.

Also keeping the USD/JPY tight-lipped is the pullback in US Treasury yields and mildly positive market sentiment, not to forget the comments from Bank of Japan (BOJ) Executive Director Shinichi Uchida.

The policymaker said, “(BOJ) must continue to support the economy with current powerful monetary easing.” On the same line were comments from Japanese Finance Minister Shunichi Suzuki who praised the divergence of monetary policy between Japan and the US.

That said, the US 10-year Treasury yields extend the week-start pullback from a 20-year high, down five basis points (bps) near 3.0% at the latest, amid anxiety over the Fed’s next move as Atlanta Fed’s Robert Bostic promoted a series of 50bps rate lifts. On the other hand, Richmond Fed President Thomas Barkin kept the 75 bps rate hike on the table. That said, the US inflation expectations, as per the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, dropped the most in 10 months to retest early March levels on Monday.

Elsewhere, comments from China’s Vice Premier Liu He who reiterates the country’s dynamic covid zero policy and offers the much-needed relief to the US stock futures around the yearly low.

It should, however, be noted that the fears of inflation weighing on the economic outlook, as well as China’s covid woes, stay on the table to keep USD/JPY on the front foot. Also likely to underpin the USD’s safe-haven demand is Russia’s rejection to step back from invading Ukraine. Above all, Wednesday’s US CPI ex Food & Energy for April, expected 6.0% YoY versus 6.5% prior, becomes crucial as the Fed’s 75 bps rate hike looms.

Technical analysis

A three-week-old ascending trend channel restricts short-term USD/JPY moves between 129.60 and 133.00.