USD/JPY counters US Dollar rebound, firmer yields below 133.00 amid challenges for BoJ policy

• USD/JPY pares the biggest daily gains in two months even as US Dollar, yields grind higher.
• Japan PM pushes for global wages at home, gives rises to hawkish hopes for BoJ.
• German, Tokyo inflation can entertain traders ahead of Fed’s preferred inflation gauge.
• Fears of higher inflation, geopolitics join mixed data to propel yields amid quarter-end consolidation.

USD/JPY prints mild losses around 132.60 heading into Thursday’s European session. In doing so, the Yen pair struggles to respect the upbeat US Dollar and Treasury bond yields amid mixed concerns about the Bank of Japan’s (BoJ) next move. Also weighing on the major currency pair are the talks of Japanese credit rating and the Federal Reserve (Fed) officials’ cautious optimism. It should be noted, however, that the geopolitical fears surrounding Russia, North Korea and China weigh on the market’s sentiment and allow the Yen to cheer its traditional haven status after rising heavily the previous day.

BoJ policymakers, including the outgoing Governor Haruhiko Kuroda, advocate for an easy money policy but the latest wage accord and Prime Minister Fumio Kishida’s readiness for higher wages can challenge the ultra-loose policies. Recently, global rating agency Fitch Ratings affirmed Japan’s sovereign credit rating at ‘A’ while maintaining a ‘stable’ outlook. “Base case remains that BoJ will maintain its loose monetary policy over the medium term,” said Fitch.

Elsewhere, Fed Chair Jerome Powell’s teasing of one more rate hike joined Fed Vice Chair for Supervision Michael Barr’s emphasis on data dependency to test the market’s previous optimism. On the same line could be Fed Chair Powell’s push for alteration in deposit insurance. As a result, the Fed hawks do flex their muscles but wait for more clues and amplify the market’s anxiety ahead of Friday’s key inflation gauge from the US, namely the Core Personal Consumption Expenditure (PCE) Price Index.

It should be observed that China Premier Li Qiang’s dislike for trade protectionism and decoupling, which indirectly targets the US, joined the North Korean and Russian tactics over nuclear power to sour the sentiment.

On a different page, the majority of the central bankers defend their previous bias about inflation and hence propel yields amid economic fears. Furthermore, International Monetary Fund’s (IMF) Managing Director Kristalina Georgieva said on Thursday, “Urgently need faster, more efficient mechanisms for providing debt support to vulnerable countries.” Her comments renew banking fears which eased previously.

Amid these plays, the S&P 500 Futures struggled around a one-week high marked the previous day, while ignoring Wall Street’s upbeat performance, whereas the US 10-year and two-year Treasury bond yields grind higher after teasing the bond buyers the previous day.

Moving forward, the US fourth quarter (Q4) Core Personal Consumption Expenditure (PCE) and final prints of the Q4 Gross Domestic Product (GDP) can entertain Yen pair traders. However, major attention should be given to Friday’s Tokyo inflation data and the Fed’s preferred inflation gauge, namely the US Core PCE Price Index.

Technical analysis

Failure to provide a daily close beyond 50-DMA, around 132.90 by the press time, directs USD/JPY bears towards a 10-week-old ascending support line, close to 130.80 at the latest.