USD/JPY retreats to 144 on firmer Japan GDP, Fed’s Powell eyed

• USD/JPY remains firmer near the highest levels in 24 years despite the latest pullback.
• US Treasury yields reverse the previous day’s downside move amid cautious optimism.
• Upbeat Q2 Japan GDP contrasts with US data, Beige Book but Fed vs. BOJ divergence to favor bulls.
• Fed’s Powell need to defend 0.75% rate hike in September to back US dollar strength.

USD/JPY steps back from the daily top, also near the highest levels since 1998, on firmer Japan data as Tokyo opens on Thursday. Even so, the yen pair remains on the bull’s radar.

That said, Japan’s second-quarter (Q2) Gross Domestic Product (GDP) came in as 0.9% QoQ versus 0.7% expected and 0.5% prior. Further, the Annualized GDP also rose to 3.5% versus 2.9% market forecasts and 2.2% in previous readings. Following the data, USD/JPY retreats from the intraday high but prints mild gains while keeping buyers hopeful.

The reason for the bullish bias towards the USD/JPY could be linked to a rebound in the 10-year US Treasury yields ahead of the key monetary policy meeting by the European Central Bank (ECB) and Fed Chairman Jerome Powell’s speech.

It should be noted that the USD/JPY pair’s status as the risk barometer also underpins the quote’s latest run-up as optimism surrounding US economics and the US dollar pullback seemed to have triggered the market’s firmer sentiment of late.

Hawkish hopes from the European Central Bank (ECB) and a narrowing trade deficit appeared to have weighed on the US dollar before a few hours. On the same line could be the Fed’s Beige Book which signaled a recovery in the supply chain and slowing price growth in nine of the 12 districts. That said, US Goods and Services Trade Balance improved to $-70.7B in July from $-80.9B prior, versus $-70.3B forecasts. Further, the Good Trade Balance deteriorated to $-91.1B from $-89.1B marked in July.

While portraying the mood, Wall Street closed positive and the yields retreated whereas the US Dollar Index (DXY) jumped to the highest levels in two decades before retreating to 109.60 by the end of Wednesday’s North American session.

Moving on, the art of Fed Chair Powell’s defense of the aggressive rate hikes will be at test during today’s speech, especially due to the hawkish hopes from the ECB. Hence, the USD/JPY pair’s further upside will hinge on how well Powell manages to convince markets of further rate hikes. It’s worth mentioning that the chatters over the Japanese central bank’s intervention to defend the yen and the Bank of Japan’s (BOJ) favor for easy money, versus the hawkish Fed, keep the USD/JPY buyers hopeful.

Technical analysis

A daily closing beyond an upward sloping resistance line from late April 2022, around 144.75 by the press time, becomes necessary for the USD/JPY bulls to keep reins. Otherwise, overbought RSI (14) could play its role to trigger the pullback towards July’s high near 139.40.