USD/JPY bears flirt with 135.50 as bond market expects BOJ to surrender YCC

• USD/JPY pares intraday losses during the two-day pullback from 24-year high.
• Foreign investors wager against Japanese Government Bonds (JGB) but domestic buyers weigh on yields.
• Mixed Japan PMI for June also exerts downside pressure, along with BOJ-linked chatters.
• US PMIs for June, Powell’s Testimony 2.0 will be important catalysts.

USD/JPY licks its wounds near intraday low, at 135.50 during Thursday’s European morning. The yen pair’s latest weakness could be linked to the mixed PMI data from Japan, as well as on chatters that the Bank of Japan’s (BOJ) Yield Curve Control (YCC) policy is under threat.

Japan’s Jibun Bank Manufacturing PMI eased to 52.7, below 54.4 expected and 53.3 prior, whereas the Services counterpart rose past 52.2 forecasts and 52.6 previous readouts to 54.2.

It’s worth noting that the downbeat performance of the US Treasury yields, recently pressured around 3.15%, also weighs on the USD/JPY prices. It should be noted that the US 10-year Treasury yields dropped the most in one week the previous day, poking the fortnight low of late.

Elsewhere, the Financial Times (FT) portrayed challenges to the BOJ’s status quo by citing the exodus of foreign investors from the Japanese bond markets. “Foreign fund managers’ renewed enthusiasm for wagers against Japanese government bonds — a trade that has backfired so frequently over the past two decades it earned the nickname ‘widow-maker’ — also puts them at odds with the majority of Japanese investors who think the BoJ will stick to its guns despite the collapse of the yen to a 24-year low,” said the FT.

It’s worth noting that four-month low inflation expectations in the US and Fed Chair Jerome Powell’s Testimony in favor of the current monetary policy also weigh on the USD/JPY prices. That said, the US inflation expectations, as per the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, dropped for the third consecutive day to the fresh low since late February, at 2.54%, by the end of Wednesday’s North American session. On the other hand, Fed’s Powell considered the present monetary policy bias appropriate to battle the inflation woes. It’s worth noting, however, that the Fed Boss’s readiness to use the aggressive measures, irrespective of their consequences, seemed to have put a floor under the greenback. On the same line is the latest news from Reuters signaling an upbeat print of June’s jobs report.

To sum up, the market’s inaction, mostly sluggish performance, keeps the USD/JPY on thin ice ahead of US S&P Global PMIs for June and the second round of Fed Chair Jerome Powell’s Testimony.

Technical analysis

Although overbought RSI conditions and bearish spinning top favor USD/JPY sellers, multiple supports around 134.50 restricts the short-term downside of the yen pair.