USD/JPY fades bounce off weekly low around mid-134.00s amid downbeat yields, mixed mood

• USD/JPY eyes the second weekly loss by paring the corrective bounce off one-week low.
• Market sentiment remains dicey amid US debt ceiling drama, bank fears and mixed data.
• BoJ defends easy-money policy, yields remain pressured as risk aversion favors bonds.
• More clues of US inflation, risk catalysts eyed for clear directions.

USD/JPY treads water around 134.00 during early Friday as it struggles to defend the previous day’s rebound from the lowest levels in a week.

In doing so, the Yen pair portrays the market’s inaction amid a light calendar and mixed sentiment ahead of the US inflation clues. However, the risk-barometer pair remains on the way to posting the second consecutive weekly loss as the yields remain pressured amid the market’s rush towards risk safety, mainly due to the fears emanating from US debt ceiling talks and banking woes. It’s worth noting, though, that the Bank of Japan’s (BoJ) defense for the easy monetary policy and the US Dollar’s latest recovery teases the USD/JPY buyers of late.

Earlier in the day, a reduction in Japan’s Money Supply M2+CD for April, to 2.5% YoY from 2.6% prior and 2.7% market forecast, seemed to have favored the USD/JPY buyers.

In case of the US statistics, the Producer Price Index (PPI) improved to 0.2% MoM for April versus 0.3% expected and -0.4% prior. More importantly, PPI ex Food & Energy, known as Core PPI, rose on MoM but eased on YoY. Further, US Initial Jobless Claims rose by 264,000 to push the level to the highest level since October 2021, which in turn escalated the risk-off mood and favored the US Dollar.

Following the data, Minneapolis Fed President Neel Kashkari mentioned that inflation has eased but warned it is above the Fed's 2% target while speaking at the Marquette CEO Town Hall in Michigan. His comments defended the Fed’s hawkish moves, in contrast to the BoJ Summary of the April Monetary Policy Meeting that showed the policymakers’ favor for the ultra-easy money practices at the Japanese central bank.

Elsewhere, the recently escalating market fears surrounding the US debt ceiling expiry and banking fallouts, seem to allow the US Dollar to brace for the first weekly gain in three while pushing down the US Treasury bond yields for the third consecutive week. With this, the USD/JPY pair’s indecision appears logical amid a light calendar at home.

That said, the postponement of the debt ceiling talks between US President Joe Biden and House Speaker McCarthy and a slump in the shares of PacWest Bancorp appear the main negative developments in those matters. Additionally, warnings from US Treasury Secretary Janet Yellen and Beth Hammack, Chair of the Treasury Borrowing Advisory Committee and Co-Head of Goldman's Global Financing Group, about US default, also threaten the market sentiment.

Against this backdrop, S&P 500 Futures print mild gains to differ from Wall Street’s mixed closing. That said, the US 10-year and two-year Treasury bond yields remain pressured around 3.37% and 3.88% by the press time.

Looking forward, USD/JPY pair traders should pay attention to the risk catalyst for intraday directions. Additionally important will be preliminary readings of the University of Michigan’s (UoM) Consumer Sentiment Index (CSI) for May, as well as the UoM 5-year Consumer Inflation Expectations for the said month.

Also read: Michigan Consumer Sentiment Index Preview: Modest improvement not enough to boost the mood

Technical analysis

A seven-week-old ascending support line precedes the 50-DMA to restrict short-term USD/JPY downside near 133.90 and 133.70 in that order. The Yen pair’s recovery, however, remains elusive unless crossing the latest peak of around 135.50.