USD/JPY fades bounce off multi-day low as yields retreat, chatters over BOJ tightening spread

• USD/JPY consolidates the biggest daily gains since mid-June.
• Mixed concerns over Fed, BOJ challenge traders amid lack of major data/events.
• Pre-Fed blackout, pullback in US inflation expectations tease bears.
• Inflation woes challenge BOJ’s easy money policies, luring the USD/JPY bears.

USD/JPY fails to extend the week-start bounce off the 200-DMA as it prints mild losses near 136.50 during Tuesday’s Asian session. 

The Yen pair’s latest losses could be linked to the chatters surrounding the Bank of Japan’s (BOJ) monetary tightening amid inflation fears. In doing so, the USD/JPY traders pay little to BOJ Governor Haruhiko Kuroda’s defense of the easy money policy.

Reuters quotes Takeo Hoshi, an academic with close ties to incumbent central bank policymakers, to mention that the Bank of Japan (BoJ) could do away with its 10-year Japanese government bond (JGB) yield cap in 2023 on increasing odds that inflation and wages will exceed expectations.

Earlier in the day, BOJ’s Kuroda mentioned that Japan had not achieved stable 2% inflation accompanied by wage rises. However, the policymaker also stated, “Once 2% inflation target is consistently met, will consider exiting ultra-loose policy.”

On the other hand, US inflation expectations, as per the 10-year and 5-year breakeven inflation rates per the St. Louis Federal Reserve (FRED) data, retreat from a one-month high and challenge the recently hawkish bias over the US Federal Reserve’s (Fed) next move. The latest prints of the 5-year and 10-year inflation expectations portray a pullback from the one-month high to 2.46% and 2.39% respectively.

It’s worth mentioning that Friday’s upbeat US data and Fedspeak challenge the dovish calls from the Fed, which test the latest optimism. That said, US ISM Services PMI rose to 56.5 in November versus 53.1 market forecast and 54.4 previous readings whereas the Factory Orders also registered 1.0% growth compared to 0.7% expected and 0.3% prior. Further, S&P Global Composite PMI improved to 46.4 versus 46.3 initial estimations while the Services counterpart rose to 46.2 compared to 46.1 flash forecasts.

On Friday, the US Nonfarm Payrolls (NFP) surprised markets by rising to 263K versus 200K expected and an upwardly revised prior of 284K while the Unemployment Rate matched market forecasts and prior readings of 3.7% for November. Following the upbeat data, Chicago Fed President Charles Evans said, "We are probably going to have a slightly higher peak to Fed policy rate even as we slow pace of rate hikes.”

Elsewhere, optimism surrounding China’s Covid conditions jostles with headlines surrounding Ukraine’s drone attack deep inside Russia.

Amid these plays, S&P 500 Futures print 0.20% intraday gains around 4,011 while snapping a three-day downtrend. That said, the US 10-year Treasury bond yields faded the bounce off an 11-week low marked the last Friday, down three basis points (bps) to 3.56% by the press time.

Moving on, a light calendar can restrict USD/JPY moves but chatters surrounding the BOJ’s exit from the easy money policy could keep bears hopeful.

Technical analysis

A one-month-old descending resistance line restricts immediate USD/JPY upside near 136.80, directing the pair towards the 200-DMA restrict, close to 134.70 at the latest.