USD/JPY retreats below 135.00 on softer yields, ignores hawkish Fed bets ahead of US inflation

• USD/JPY remains depressed after rising to one-week high on Friday, mildly offered of late.
• Yields pare post-NFP gains as traders brace for Wednesday’s US CPI.
• Fears surrounding Russia, Taiwan join mixed Japan data to also cap the upside.
• Japan Machine Tool Orders, second-tier US employment data will decorate the calendar.

USD/JPY struggles for clear directions, after beginning the week on a mildly negative footing, as it bounces off an intraday low near 134.75 during the initial hours of Tuesday’s Tokyo open.

The yen pair’s latest inaction could be linked to the sluggish markets, a light calendar in Asia and the cautious mood ahead of the US Consumer Price Index (CPI) for July, up for publishing on Wednesday. Also challenging the USD/JPY moves are the recently sidelined US Treasury yields, after the previous day’s fall.

That said, the US 10-year Treasury yields dropped nearly seven basis points (bps) to 2.75% at the latest, following a 14-bps run-up on Friday. The pullback in yields can be attributed to the market’s positioning ahead of the key US inflation data.

Even so, the Fed funds futures price in 69% chance of another 75 bps rate hike in September, per Reuters, which in turn keeps the USD/JPY bulls hopeful. It should be noted that the recent increase in the US inflation expectations, per the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, also underpins the cautious optimism of the USD/JPY buyers.

It should be noted that Japan’s first current account deficit in five months joined the downbeat Trade Balance for June to weigh on the USD/JPY prices.

Amid these plays, Wall Street began Monday’s trading on a firmer footing before closing mixed whereas the S&P 500 Futures print mild gains by the press time.

Given the market’s inaction and a light calendar, USD/JPY prices may witness inaction ahead of Japan’s Machine Tool Orders for July, prior 17.1%. Following that, the US Nonfarm Productivity and Unit Labor Costs for the second quarter (Q2) could entertain USD/JPY traders. Forecasts suggest that the US Nonfarm Productivity could improve to -4.6% from -7.3% prior while Unit Labor Costs may ease to 9.5% versus 12.6% previous readings.

Above all, chatters surrounding China, Taiwan and the US CPI, as well as the Fed’s rate hike in September, will be important to track for clear directions.

Also read: US CPI Preview: It is the hard core that counts, five scenarios for critical inflation data

Technical analysis

USD/JPY sellers await a clear downside break of the weekly support line, around 133.90 by the press time, to retake control. On the contrary, the 50-DMA  and a three-week-old resistance line, respectively around 135.15 and 135.50, restrict the short-term upside of the pair. It’s worth noting that the pair buyers remain hopeful until the quote stays beyond the 100-DMA support of 131.00.