USD/JPY pokes two-month low near 131.50 amid downbeat yields, recession fears

• USD/JPY pauses four-day downtrend near the lowest levels since early June.
• Yields remain pressured amid “technical recession” fears, mixed concerns over Fed’s next moves.
• Expected increase in Japan’s minimum wage also underpins JPY strength.
• Fedspeak, China-linked headlines could entertain traders.

USD/JPY bears keep reins around the lowest levels in eight weeks as they flirt with the 131.50 level during Tuesday’s Asian session. The pair’s latest weakness could be linked to the downbeat yields and the recent positive headlines concerning Japan, not to forget mixed chatters surrounding the Fed and China.

The US 10-year Treasury yields refreshed a four-month low to around 2.58% the previous day as US data amplified the economic slowdown concerns. The same drowned the US dollar as traders await the key US employment data for July, up for publishing on Friday. That said, US Dollar Index (DXY) refreshed it's monthly low, before bouncing off 105.25 on Monday.

US ISM Manufacturing PMI dropped to the lowest since 2020 in July as the activity gauge dropped to 52.8 versus 53.0 prior. However, the actual figures were better than the 52.0 market forecast. Also, final readings of the US S&P Manufacturing PMI eased below 52.3 initial estimates to 52.2, compared to 52.7 prior. Furthermore, Germany’s Retail Sales dropped 8.8% YoY in June versus -8.0% market consensus and -3.6% prior.

It should be noted that the second consecutive day quarterly decline in the US Gross Domestic Product (GDP) triggered a “technical recession” the previous week and weighed on the US dollar. On the same line were Fed Chair Jerome Powell’s indirect signals that the hawks are running out of steam.

On a different page, Reuters quotes three sources familiar with the matter to mention that US House of Representatives Speaker Nancy Pelosi was set to visit Taiwan on Tuesday as the United States said it wouldn't be intimidated by Chinese threats to never "sit idly by" if she made the trip to the self-ruled island claimed by Beijing.

Amid these plays, Wall Street closed with mild losses while the US 10-year Treasury yields refreshed a four-month low of around 2.58%. That said, the S&P 500 Futures print mild losses of around 4,120 by the press time.

Looking forward, speeches from Chicago Fed President Charles L. Evans and President of the Federal Reserve Bank of St. Louis James Bullard will be important for short-term USD/JPY directions.

Technical analysis

A horizontal area comprising highs marked during April and May, near 131.25-35, could challenge USD/JPY bears amid oversold RSI (14).