USD/JPY braces for 138.30 hurdle on firmer yields ahead of US inflation, FOMC

• USD/JPY cheers upside break of three-week-old resistance to refresh intraday high.
• Yields remain firmer amid recession woes but light calendar on Monday, firmer Japan PPI readings probe the Yen buyers.
• US CPI, Fed’s signals for future rate hikes will be important for near-term directions.
• Chatters surrounding BOJ’s tightening, geopolitical headlines may offer extra directions.

USD/JPY picks up bids to favor buyers around the 137.00 threshold as the cautious mood in the market underpins the US Dollar demand during early Monday. Adding strength to the upside momentum is the technical breakout and hawkish hopes from the US Federal Reserve (Fed).

It’s worth noting that the recession woes have recently challenged the market sentiment amid a light calendar day ahead of the busy week. That said, US Treasury Secretary Janet Yellen said, “There's a risk of a recession, but it certainly isn't something that is necessary to bring inflation down.” Further, the economic slowdown fears could be linked to the yield curve inversion as the US 10-year Treasury bond yields and the two-year bond coupons portray a negative difference.

To portray the risk appetite, the S&P 500 Futures print mild losses near 3,960 while tracking Friday’s downbeat close of Wall Street. Further, the US 10-year Treasury yields remain firmer around 3.58%. It should be observed that the US 2-year Treasury bond yields flash 4.35% as the latest quote.

Not only the recession woes but recently firmer US data also favor the hawkish hopes from the Fed and propel the US Dollar. the Producer Price Index (PPI) matched the market forecasts of 7.4% YoY for November versus 8.1% prior. Further, the Core PPI rose to 6.2% YoY versus 6.0% expected and 6.7% previous readings. Additionally, preliminary readings of the University of Michigan’s (UoM) Consumer Sentiment Index rose to 59.1 for December versus 53.3 market forecasts and 56.8 final readings for November. Moreover, the 1-year inflation expectations dropped to 4.6%, the lowest since September 2021 while compared to 4.9% expected whereas 5-10 year expectations were stable at 3.0%. It should be noted that the US ISM Services PMI improved to 56.5 versus 54.4 expected.

At home, Japan’s Producer Price Index (PPI) rose to 9.3% YoY in November versus 8.9% expected and 9.1% prior. However, the nation’s BSI Large Manufacturing Conditions Index for the fourth quarter (Q4) slumped to -3.6 QoQ versus 0.1% market forecasts and 1.7 previous readings.

Although the risk-off mood and the firmer US data keep the USD/JPY buyers hopeful, talks surrounding the Bank of Japan’s (BOJ) monetary policy tightening and a light calendar on Monday challenge the pair’s intraday upside. During the weekend, the BOJ policymaker Hajime Takata said in an interview with Japan's Nikkei newspaper that Japan's economy is not yet in a phase where the central bank can end yield curve control (YCC). Additionally, “We will be flexible on timing of tax increase for defense,” said Japan's Prime Minister Fumio Kishida. The policymaker also added that by the end of the year, I will decide on the source of defense funds.

Looking forward, a light calendar can restrict the immediate upside of the USD/JPY pair but a cautious mood and hawkish hopes from the Fed could keep the Yen pair firmer ahead of Wednesday’s Federal Open Market Committee (FOMC).

Technical analysis

A clear upside break of the three-week-old resistance line, now support near 136.65, directs USD/JPY buyers towards a confluence of the 21-DMA and a descending trend line from late October, around 138.30.