USD/JPY Prods Yen Falls Close To 139.50 As Yields Retreat And Risk Diminishes In Advance Of US Inflation

The USD/JPY recovers from its intraday low and consolidates its first daily loss in three days as Tokyo opens for trading on Tuesday. Even so, the Yen-U.S. dollar pair remained moderately offered at 139.55 as of press time.

However, the most recent appreciation of the Yen pair may be attributable to the weak Japan data that supports the Bank of Japan's (BoJ) dovish stance. Japan's Business Sentiment Index (BSI) Large Manufacturing Conditions Index for the second quarter (Q2) fell to -0.4 versus 0.1 anticipated and -10.5 previously.

Japan's Producer Price Index (PPI) for May decreased for the fifth consecutive month on Monday, falling to 5.1% YoY from 5.8% previous readings and 5.5% market expectations. Nonetheless, monthly figures also dissatisfied yen traders, coming in at -0.7% MoM compared to -0.2% expected and 0.2% previously.

It should be noted that Bank of Japan (BoJ) policymaker Masazumi Wakatabe stated in a Bloomberg TV interview early on Monday, "It is still too early to determine whether this inflation is sustainable and stable." Wakatabe, however, ruled out the possibility of any action by the Japanese central bank at the June meeting, predicting that there would be no action.

The US Dollar Index (DXY) struggles to defend its two-day winning trend as market participants place dovish bets on the US Federal Reserve (Fed) in advance of Wednesday's Federal Open Market Committee (FOMC) meeting. Nonetheless, the increase in wagers favoring a 0.25 basis point (bps) rate hike by the Federal Reserve (Fed) in July boosts sentiment and supports the US Dollar and the USD/JPY exchange rate. It should be emphasized that the CME's FedWatch Tool suggests the US central bank has almost no room to maneuver.

After the US expanded its prohibition on imports from Xinjiang, a trade dispute is developing, which weighs on the risk profile and the USD/JPY exchange rate. According to Reuters, China has pledged to defend Chinese firms against any US sanctions. Bloomberg recently published the prepared remarks of US Treasury Secretary Janet Yellen's upcoming testimony before the House Financial Services Committee, in which she stated that the International Monetary Fund (IMF) and the World Bank (WB) serve as important counterweights to non-transparent, unsustainable lending from others, such as China.

It should be noted that the cautious sentiment preceding the US inflation data and the impending $3 trillion worth of bond issuance from the US Treasury Department due to the debt-ceiling agreement also exert downward pressure on sentiment and the USD/JPY exchange rate. In light of these factors, the 10-year and 2-year US Treasury bond yields maintain Monday's decline near 3.73% and 4.55%, respectively.

Moving forward, bond market movements and risk catalysts will be crucial in determining the USD/JPY pair's short-term movements. Consequently, the US Consumer Price Index (CPI) for May will be in the spotlight as Wednesday's Fed decision approaches. Notable is the fact that the market anticipates no change in the Core CPI MoM figure of 0.4%, as milder figures could delay July rate hike concerns and prevent the Fed from adopting a hawkish tone. The same will weigh on the U.S. dollar and can satisfy bears in the Yen pair.