USD/JPY extends the corrective pullback from 24-year peak, slides closer to mid-136.00s

• A combination of factors prompted some profit-taking around USD/JPY on Tuesday.
• Intervention speculations, along with the risk-off mood offered support to the JPY.
• Retreating US bond yields acted as a headwind for the USD and exerted pressure.
• The Fed-BoJ policy divergence to limit losses ahead of the US CPI on Wednesday.

The USD/JPY pair witnessed some profit-taking on Tuesday and eroded a part of the previous day's strong gains to its highest level since September 1998. The retracement slide dragged spot prices closer to mid-136.00s heading into the North American session and was sponsored by a modest US dollar pullback from a two-decade high.

Japanese Finance Minister Shunichi Suzuki expressed concerns about the recent sharp decline in the yen and said to take appropriate measures if necessary. Apart from this, the prevalent risk-off environment - as depicted by an extended selloff in the equity markets amid fears about a possible global recession - drove some haven flows towards the Japanese yen. This, in turn, prompted bulls to take some profits off the table and exerted downward pressure on the USD/JPY pair.

The flight to safety was reinforced by a further decline in the US Treasury bond yields, which resulted in the narrowing of the US-Japan rate differential and offered additional support to the JPY. In fact, the yield on the benchmark 10-year US government bond slipped further below the 3.0% threshold and failed to assist the US dollar to preserve its modest intraday gains to a fresh two-decade high. This further contributed to the USD/JPY pair's intraday corrective pullback.

The downside, however, seems limited, at least for the time being, amid the divergent monetary policy stance adopted by the Bank of Japan and the Federal Reserve. In fact, BoJ Governor Haruhiko Kuroda reiterated on Monday that the central bank remains ready to take additional monetary easing steps as necessary. In contrast, the FOMC minutes released last week reaffirmed market bets that the US central bank would retain its aggressive policy tightening cycle to curb soaring inflation.

Policymakers indicated that another 50 or 75 bps rate hike is likely at the upcoming FOMC meeting in July and emphasized the need to fight inflation even if it results in an economic slowdown. Hence, the market focus would remain on the latest US consumer inflation figures, due on Wednesday. The US CPI report will play a key role in influencing the near-term USD price dynamics and help investors determine the next leg of a directional move for the USD/JPY pair.

In the meantime, the US bond yields will drive the USD demand and provide some impetus to the USD/JPY pair amid absent relevant market-moving economic releases from the US on Tuesday. Apart from this, traders will take cues from the broader market risk sentiment to grab short-term opportunities around the major.

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