USD/JPY traces yields to retreat towards 135.00, US inflation, Taiwan eyed

• USD/JPY pares intraday gains around one-week high as bulls take a breather after the biggest daily jump in seven weeks.
• Yields retreat from fortnight high as traders prepare for Wednesday’s US CPI.
• US NFP propelled hawkish Fed bets and favored USD bulls, Taiwan concerns also underpin greenback’s safe-haven demand.
• Japan’s trade deficit widened in June, Eco Watchers Survey eyed.

USD/JPY seesaws around 135.30 as buyers find less acceptance around a one-week high during Monday’s Asian session. The yen pair’s latest inaction could be linked to the cautious mood ahead of the key US inflation data, as well as mixed Japanese statistics and fears surrounding the US-China tension over Taiwan. Above all, the retreat in the US Treasury yields seems to challenge the pair buyers of late.

That said, the US 10-year Treasury yields ease back to near 2.82% after rallying 14 basis points (bps) to 2.83% the previous day. Also important to note is a reduction in Japan’s Trade Balance on BOP Basis for June, down to ¥-1,114B from ¥-760.2B expected and ¥-1,951.2B prior.

The US bond coupons took clues from the strong US employment data to portray the hawkish Fed bets and propel the USD/JPY prices on Friday. The headline Nonfarm Payrolls (NFP) rose to 528K versus 250K expected and 398K upwardly revised prior. Further, the Unemployment Rate also inched lower to 3.5% compared to 3.6% expected and previous readings.

It’s worth noting that Wall Street benchmarks closed negative and also helped to renew the US dollar strength, due to the greenback’s safe-haven nature.

Other than the NFP-inspired US dollar strength, the Sino-American tension also seemed to have propelled the USD/JPY the previous day. Reuters came out with the news suggesting that China is up for ‘regular’ military drills east of the Taiwan Strait median line. That said, the dragon nation’s Foreign Ministry announced on Friday that they will sanction US House of Representative Speaker Nancy Pelosi over the Taiwan visit. On the other hand, Taiwan's Defense Ministry reported 66 Chinese aircraft conducting activities in the Taiwan Strait as of 5 pm local time on Sunday. Further, US Secretary of State Anthony Blinken mentioned that China's provocative actions were a significant escalation.

Amid these plays, S&P 500 Futures print mild losses and the Asia-Pacific shares also remain pressured.

Looking forward, US Consumer Price Index (CPI) for July is the key data to watch for this week, especially after the recent strong US employment numbers. For intraday moves, Japan’s Eco Watchers Survey for July and risk catalysts may entertain the momentum traders.

Technical analysis

Despite the latest pullback, USD/JPY holds onto Friday’s breakout of the 50-DMA and a downward sloping trend line from July 21, respectively around 135.00 and 134.60. However, the upside momentum needs validation from the 21-DMA hurdle surrounding 136.00.