USD/JPY pares biggest daily loss in three months near 114.00 amid sluggish yields

• USD/JPY licks its wounds after declining from the four-year high.
• Receding US inflation expectations dragged Treasury yields, DXY in absence of major catalysts.
• Japan eases coronavirus-led activity restrictions, eyes closer ties with the US.
• Fedspeak, US Jobless Claims eyed amid light calendar.

USD/JPY refreshes intraday high around 114.25, before stepping back to 114.15, as Tokyo opens for Thursday’s trading. In doing so, the yen pair consolidates the previous day’s losses after dropping the most since August. It should be noted that the quote poked March 2017 high before activating the stated fall on Wednesday.

A notable pullback in the US Treasury yields and the US Dollar Index (DXY) could be traced to the latest weakness in the USD/JPY prices. Behind the moves are the receding US inflation expectations and the latest Fedspeak pushing for rate hikes.

That said, the US inflation expectations, as measured by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, drop for the second consecutive day by the end of Wednesday’s North American session, per the data source Reuters.

On the other hand, US 10-year Treasury yields retreat from the highest levels since October 26 to post the heaviest daily fall in a week whereas DXY tracks bond yields and marks a first negative daily closing in three after refreshing the 16-month top. It’s worth noting that S&P 500 Futures print mild gains while Japan’s Nikkei 225 drop 0.40% by the press time.

Recently, Charles L. Evans, the Chief Executive Officer of the Federal Reserve Bank of Chicago said, “It will take until the middle of next year to complete the Fed's wind-down of its bond-buying program, even as the central bank remains 'mindful' of inflation.” Also noteworthy are the US efforts to increase oil supply and the White House comments suggesting receding supply chain issues, not to forget Japan’s unlock and aim for stronger ties with the US to stop China from Taiwan. ALso favoring the Japanese yen are the talks that the Asian nation has been able to achieve the highest inoculation rate in the Group of Seven (G7) without any mandates.

Looking forward, a lack of major data/events will keep the Fedspeak and Treasury moves in the driver’s seat whereas the US Weekly Jobless Claims may add to the watcher’s list.

Technical analysis

Unless dropping back below a two-month-old support line, around 113.40, USD/JPY remains capable of challenging March 2017 high near 115.50.