USD/JPY traces yields’ retreat to ease from two-month high towards 137.00 amid US debt ceiling woes

• USD/JPY eases from the highest levels in two months, prods three-day uptrend.
• Yields remain firmer amid receding banking woes, upbeat US data and equities.
• BoJ’s defense to the easy-money policy versus hawkish Fed bets, unimpressive US/Japan data favor Yen pair buyers.
• Fresh fears surrounding US debt ceiling, cautious mood ahead of the key US data/events underpin USD/JPY upside.

USD/JPY remains sidelined after refreshing a two-month high,  dropping to 137.30 during early Tuesday. In doing so, the Yen pair portrays the cautious mood ahead of the key US data/events amid the full market’s return, after Monday’s holiday in major bourses.

Also underpinning the pair’s upside could be the recently firmer US Treasury bond yields, as well as risk-positive headlines surrounding the First Republic Bank. However, the recent fears about the US debt ceiling expiration seem to prod the quote even if the Bank of Japan (BoJ) doves contrasts with the hawkish Federal Reserve (Fed) bets to defend the USD/JPY bulls.

Reuters came out with the news suggesting the US Senate Majority Leader Chuck Schumer’s push for an expedited process to consider a clean two-year suspension of the federal debt ceiling. Fueling the US diplomat’s move is the Treasury Department’s recent updates of the default by pulling forward the date of running out of funds to match obligations if the current debt ceiling isn’t altered by June 01, previously signaled as July. “US Treasury Secretary Janet Yellen said in a letter to Congress that the agency may be unable to meet all of its debt obligations as soon as June 1 if the debt ceiling is not raised, putting new urgency on talks in Congress,” said Reuters.

The same triggered chatters of US President Joe Biden’s call to four top US diplomats and arranging a meeting on May 09 made rounds. Further, US House of Representatives Speaker Kevin McCarthy mentioned that there is a bill sitting in the Senate as we speak that would put the risk of default to rest.

Previously, hawkish Fed bets and the BoJ’s defense of the ultra-easy monetary policy, backed by the upbeat US inflation clues via the Core PCE Price Index propel the USD/JPY prices to renew a multi-day high. On the same line could be the US regulators’ seizing of the First Republic Bank’s assets and selling them to the new buyer, namely JP Morgan. “JPMorgan will pay $10.6 billion to the U.S. Federal Deposit Insurance Corp (FDIC) as part of the deal to take control of most of the San Francisco-based bank's assets and get access to First Republic's coveted wealthy client base,” said Reuters.

Against this backdrop, Wall Street closed with gains even if the S&P 500 Futures printed mild losses of late. Further, the US Treasury bond yields began the key week on a positive footing and allowed the US Dollar to extend the previous gains.

Moving on, the return of the full markets and cautious sentiment may prod the USD/JPY buyers ahead of US Factory Orders for March, expected to rise by 0.8% MoM versus -0.7% prior. However, the monetary policy divergence between the BoJ and the Fed can keep the Yen pair bulls hopeful.

Technical analysis

Be it the descending resistance line from mid-December 2022 or the Year-To-Date (YTD) high marked in March, the 137.75-90 has it all to challenge the USD/JPY bulls. Also challenging the Yen pair buyers are the overbought conditions of the RSI (14) line.