USD/JPY retraces from weekly highs, and slips below 136.00 on safe-haven flows

• Risk-off impulse dominates the last trading day of June, boosting safe-haven peers.
• The USD/JPY falls from 137.00 below the 136.00 mark, weighted by the drop in US Treasury yields.
• The US Federal Reserve’s favorite inflation gauge, the core PCE came lower than the previous reading, signaling the effects of higher rates begin to feel.

The USD/JPY slides on Thursday, following a lower-than-expected inflation report, which could deter the US Federal Reserve from tightening at a faster pace amidst odds increasing of recession, keeping investors uneasy. At 135.85, the USD/JPY retreats from daily highs shy of 137.00, back below the 136.00 mark.

Negative sentiment and falling yields, a headwind for the USD/JPY

Risk aversion dominates the markets, as half/quarter/month-end flows bolstered the greenback. US equities remain heavy; the greenback rises shown by the US Dollar Index up by 0.04%, at 105.135, while US Treasury yields drop, led by the 10-year T-note rate at 3.00%, diving nine bps.

Besides that, fears of a recession as global growth stagnated, alongside high inflation, spurred a flight to safe-haven. Particularly in the USD/JPY, the yen remains bid, boosted by the fall in US Treasury yields, weighed by falling US inflation expectations, as illustrated by the five and 10-year break-even inflation rates, easing from YTD highs around 3.59% and 3.02% each, down to 2.59% and 2.36%, respectively.

Source: Tradingview/St. Louis FRED

In the meantime, US inflation, as measured by the Personal Consumption Expenditure (PCE), rose by 6.3% YoY, unchanged in May, the US Bureau of Economic Analysis reported. Meanwhile, the Fed’s favorite gauge of inflation, the core PCE, which excludes volatile items, grew 4.7%, YoY, lower than the 4.9% in April.

On the Japanese front, the docket revealed Industrial Production, which shrank faster than expected -1.3% MoM to -7.2%. Annually based, recovered some ground but stayed negatively at -2.8%, from a previous reading at -4.9%.

USD/JPY Key Technical Levels