USD/JPY trips down below 135.00 as US bond yields drop

• USD/JPY tumbles, due to its high correlation with the US 10-year bond yield, dropping below 2.80%.
• Fed’s Bowman: The Fed should consider 75 bps in future meetings.
• US CPI and PPI for July, both inflations readings are eyed.

The USD/JPY begins the week on the wrong foot, slides below the 50-day EMA, on a soft US dollar, undermined by falling US Treasury yields, amidst an upbeat sentiment, despite worries of an aggressive Fed and China-US jittery on Taiwan.

At the time of writing, the USD/JPY is trading at 134.63 after hitting a daily high at 135.58. Nevertheless, the appetite for US Treasuries keeps the US 10-year bond yield down five bps at 2.778%, so the USD/JPY  pierced below the 50-day EMA at 134.98.

USD/JPY drops on lower US bond yields, even though the narrative supports the US dollar

A light US calendar keeps investors reassessing last week’s employment report, pouring cold water on recession fears while fueling expectations of a Federal Reserve 75 bps rate hike. Nevertheless, with the US Consumer Price Index (CPI) for July looming, focus shifted to expectations that a lower reading might deter the US central bank from tightening aggressively. In the meantime, Fed’s money market futures STIRs odds of a 75 bps hike are at 90%, up from last week’s 76.5%.

That said, Federal Reserve speakers in the last week had been hawkish since the dovish reaction after the FOMC’s meeting. Also, policymakers reiterated the Fed’s commitment to bringing inflation down. Over the weekend, Fed’s board member Michell Bowman reiterated that the Fed should consider 75 bps rate hikes at future meetings to get inflation back down to the central bank target. She added that she would be data-dependent for the following meetings.

Elsewhere, the Japanese calendar featured Bank Lending for July, which increased 1.8% YoY, doubling estimations. At the same time, the current account shrank the deficit from ¥-703 billion to ¥-132.4 billion.

However, the USD/JPY remains irrespective of the current economic environment during the day. Even though the pair pushed below the 50-day EMA unless sellers achieve a daily close below the August 4 daily high at 134.42, buyers remain in charge.

What to watch

The Japanese economic docket will feature Preelimnary Machine Tool Orders. On the US front, the calendar will reveal the NFIB Small Business Optimism Index, Consumer Inflation Expectations, and the US IBD/TIPP Economic Optimism for July, estimated at 38.6.

USD/JPY Key Technical Levels