USD/JPY dribbles around 20-year high near 131.00 with eyes on US PCE inflation

• USD/JPY bulls take a breather at the two-decade top in search of fresh clues, amid off in Japan.
• Strong yields, safe-haven demand and Fed v/s BOJ divergence propel the pair.
• US GDP details, BOJ’s double-down on easy money recently favored the bulls.
• Risk catalysts, US data to direct intraday traders amid Japan’s Showa Day Holiday.

USD/JPY seesaws around 131.00 during the early Friday morning in Asia, after rising to the highest levels since April 2002 the previous day. The pair’s latest inaction could be linked to the off in Japan, as well as a cautious sentiment ahead of the Fed’s preferred gauge of inflation.

The yen pair rallied the most since March 2020 the previous day after the Bank of Japan (BOJ) showed readiness for unlimited bond-buying to maintain the yield target. The Japanese central bank also cited the sustained inflation below the 2.0% target as the reason to support their dovish move. Furthermore, the BOJ also lacked economic optimism within the forecasts and added weakness to the JPY.

On the other hand, the US Q1 2022 GDP details and risk-aversion wave added to the USD/JPY pair’s north-run. Although the headline Annualized GDP marked the first contraction in two years with -1.4% figures versus 1.1% forecast and 6.9% prior, the details relating to the personal consumption, inventories and Net trade flashed positive signs.

Following the firmer data, CME’s FedWatch Tool showed around a 96% probability of a 0.50% rate hike during the May monthly meeting. Additionally favoring the odds of a faster Fed normalization was the rising inflation expectations, as per the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data.

Elsewhere, the Russia-Ukraine crisis and the West versus Moscow tussles, due to the invasion of Kyiv, join China’s covid concerns to weigh on the risk appetite and support the US dollar’s safe-haven demand.

Amid these plays, Wall Street benchmarks rose for the second consecutive day, backed by upbeat earnings, whereas the US 10-year Treasury yields rose 1.5 basis points (bps) to 2.83%.

Looking forward, an absence of bond moves in Asia may challenge the USD/JPY buyers and can trigger the pair’s pullback. However, major attention will be given to the Fed’s preferred gauge of inflation, namely the US Core Personal Consumption Expenditures Price Index for March, expected to ease to 5.3% YoY versus 5.4% prior.

Technical analysis

The USD/JPY pair’s rebound from 127.00, followed by a clear upside break of the early-month high surrounding 129.40, enables the buyers to aim for the 100% Fibonacci Expansion (FE) of April 12-27 moves, near 131.60 by the press time.

Alternatively, the pullback can initially aim for the 130.00 round figure ahead of challenging the 129.40 and the 10-DMA support near 128.60.