USD/JPY pares the biggest weekly gains in five years around 130.50 ahead of US inflation

• USD/JPY remains on the back foot after posting the highest weekly closing in 20 years.
• Yields cheered NFP surprise, hawkish Fedspeak before retreating on market’s anxiety.
• BOJ’s Kuroda praises weak yen, loose monetary policy but fails to recall pair buyers.
• Headlines concerning China, US trade measures also appear important to watch ahead of the US CPI.

USD/JPY begins the key week on a negative note, down 0.30% near 130.50 heading into Monday’s European session open. The yen pair tracked the recovery in the US Treasury yields, as well as chatters of monetary policy divergence between the Fed and the Bank of Japan (BOJ) to post the biggest weekly gain since late 2016.

The US 10-year Treasury yields posted the first weekly gains in four, backed by a strong US jobs report and hawkish Fedspeak. On Friday, US Nonfarm Payrolls (NFP) came in 390K for May, more than 325K expected but lesser than the upwardly revised 428K previous readouts. Further, the Unemployment Rate remained unchanged at 3.6% versus expectations of a slight decline to 3.5%. Additionally, the US ISM Services PMI fell to 55.9 in May, versus 56.4 market consensus and 57.1 flashed in April.

Following the data, Cleveland Fed President Loretta Mester crossed wires while saying that the one problem that the Fed has is inflation. The policymaker also added that the risks of a recession have gone up. It’s worth noting that the firmer US NFP joined the recently hawkish Fedspeak to propel the odds of a third 50 bps rate hike in September to 75% from 35% appeared last week, which in turn weighed on market sentiment.

At home, Bank of Japan (BOJ) Governor Haruhiko Kuroda repeats his support for easy money policies while also saying, “If moves are not too sharp and stable, weak yen is positive for Japan’s economy,” per Reuters.

It’s worth noting that the risk-positive headlines concerning China limit the immediate downside of USD/JPY, due to its risk barometer status. Beijing’s readiness to ease the virus-led activity controls joins the US preparations for announcing tariff relief for China to underpin cautious optimism in the market. “Dine-in service in Beijing will resume on Monday, except for the Fengtai district and some parts of the Changping district, the Beijing Daily said. Restaurants and bars have been restricted to takeaway since early May,” reports Reuters. On the other hand, US Commerce Secretary Gina Raimondo said, per Reuters, “President Joe Biden has asked his team to look at the option of lifting some tariffs on China that were put into place by former President Donald Trump, to combat the current high inflation.”

Moving on, the US Consumer Price Index (CPI) for May appears the key event for the USD/JPY traders amid recent talks of a faster/heavier Fed rate hike, which in turn could favor the pair buyers.

Technical analysis

Friday’s daily closing, the highest since early 2002, joins recently firmer MACD signals and upbeat RSI to keep USD/JPY buyers hopeful of overcoming the 131.00 key resistance. Following that, the pair’s run-up towards the 61.8% Fibonacci Expansion (FE) of March-May moves, around 132.60, appears imminent.

Alternatively, a confluence of the 10-DMA and 20-DMA near 128.70-60, restricts the pair’s immediate pullback moves ahead of an upward sloping support line from early March, close to 127.95 by the press time.