USD/JPY bulls approach 139.00 to refresh multi-year high as yields portray recession fears

• USD/JPY stays on the front foot at the highest levels since September 1998.
• US inflation propels hawkish Fed bets, yield curve inversion amplifies recession woes.
• Japan policymaker showed concerns over the weakening yen but talks down intervention.
• US PPI, risk catalysts will be important for intraday directions.

USD/JPY takes the bids around 138.77 to refresh the 23-year high during the early Thursday morning in Europe. The yen pair’s latest run-up could be linked to the firmer US Treasury yields and the US dollar amid hopes of the Fed’s aggression after witnessing the multi-year high inflation data.

The US 10-year Treasury yields rose three basis points (bps) to 2.93% at the latest while the S&P 500 Futures drop 0.50% to portray the risk-off mood by the press time. More importantly, the spread between the 2-year US Treasury yields and its 10-year counterpart widens and in turn portrays the market’s fears of economic slowdown. The yield curve inversion, the condition of higher short-term rates, hints at the investors’ rush for risk safety.

The yield curve inversion magnified the previous day after the US Consumer Price Index (CPI) for June, jumped to the highest level in 40 years to 9.1% YoY versus 8.8% expected and 8.6% prior. That said, the Core CPI, which excludes volatile food and energy prices, eased to 5.9% from 6% prior but crossed analysts' forecast of 5.8%.

It should be noted that the multi-year high US inflation also fuelled the market’s bets for hawkish Fed actions in July. Reuters cites CME data to mention the USD/JPY bulls while saying, “They are now pricing in a nearly 80% probability of a full percentage-point rise at the coming meeting, according to an analysis of the contracts by CME Group,” said Reuters.

The hawkish Fed bets also gain support from the Fed policymakers as San Francisco Federal Reserve Bank President Mary Daly said that her most likely posture is a 75bp hike in July but a 100bp is possible, as reported by the New York Times. Before that, Richmond Federal Reserve President Thomas Barkin conveyed his support for higher rates in the last meeting while Cleveland Federal Reserve President Loretta Mester also said, “The data on CPI does not suggest a rate hike in July any smaller than that in June.” More recently, the Atlanta Fed President Raphael Bostic said “everything is in play” for policy action after data showed that US inflation accelerated again to a fresh four-decade high last month, as reported by Bloomberg.

On the other hand, Japanese Chief Cabinet Secretary Hirokazu Matsuno came out on the wires, via Reuters, attempting some verbal intervention as soon as the USD/JPY prices rose past 138.00. The policymaker said, “Watching FX market even more closely while working with BOJ.”

Looking forward, the Producer Price Index for June and the weekly Jobless Claims will decorate the calendar whereas the risk catalysts like recession fears and Fed bets could offer more details to forecasts short-term USD/JPY moves.

Technical analysis

USD/JPY bulls cheer a clear upside break of the three-week-old resistance line, now support around 137.60, to aim for the 140.00 threshold.