Japanese Yen continues to lose ground as super-long JGB yields fall sharply; USD/JPY jumps closer to mid-143.00s

• The Japanese Yen attracts heavy intraday sellers amid a sharp decline in JGBs and trade optimism.
• Japan’s strong Services PPI reaffirms BoJ rate hike bets and should limit any further JPY depreciation.
• Dovish Fed expectations should cap the attempted USD bounce and act as a headwind for the USD/JPY.

The Japanese Yen (JPY) extends intraday descent heading into the European session and moves further away from over a one-month high touched against its American counterpart earlier this Tuesday. Reports that Japan will consider trimming issuance of super-long bonds in the wake of recent sharp rises in yields for the notes drag the yield on 30-year Japanese government bonds to the lowest level since May 8. This, along with the optimism led by US President Donald Trump's decision to delay imposing tariffs on the European Union (EU), turns out to be a key factor undermining the safe-haven JPY.

Investors, however, remain on edge on the back of the uncertainty surrounding Trump's trade policies and worries about the worsening US fiscal conditions. Furthermore, bets that the Federal Reserve (Fed) will lower borrowing costs further in 2025 might keep a lid on the attempted US Dollar (USD) recovery from the vicinity of the monthly low and cap the USD/JPY pair. Hence, it will be prudent to wait for strong follow-through buying before confirming that spot prices have bottomed out or positioning for any meaningful appreciation ahead of this week's important macro data from the US and Japan.

Japanese Yen is undermined by a combination of factors; downside potential seems limited amid BoJ rate hike bets

• Two sources told Reuters on Tuesday that Japan's Ministry of Finance (MOF) will consider tweaking the composition of its bond program for the current fiscal year, which could involve cuts to its super-long bond issuance. This triggers a sharp decline in the super-long JGB yields and weighs on the Japanese Yen.
• The Bank of Japan reported earlier this Tuesday that the Services Producer Price Index (PPI) – a leading indicator of Japan's service-sector inflation – rose 3.1% from a year earlier in April. This comes on top of last week's strong consumer inflation figures and keeps alive expectations of further interest rate hikes by the BoJ.
• Moreover, BoJ Governor Kazuo Ueda showed readiness to continue raising rates and said that the central bank must be vigilant to the risk rising food prices could push up underlying inflation that is already near its 2% target. This boosted the Japanese Yen and dragged the USD/JPY pair to over a one-month low during the Asian session.
• Japan's Finance Minister Katsunobu Kato said that interest rates reflect various factors, but the market sees rising rates as reflecting concerns about state finances. Kato added that the government will closely monitor the bond market situation amid rising super-long bond yields and will continue close dialogue with bond investors.
• US President Donald Trump announced an extension of the deadline for imposing 50% tariffs on European Union imports to July 9, lifting the global risk sentiment. However, the uncertainty around Trump’s trade policies remains, which keeps investors on edge and should continue to act as a tailwind for the safe-haven JPY.
• Trump called Russian President Vladimir Putin ‘crazy’ and said that he was considering new sanctions against Russia after the biggest drone attack on Ukraine in the more than three-year-old war. Furthermore, Israel continues to pound Gaza, keeping geopolitical risks in play. This should underpin demand for the JPY.
• The US Dollar, on the other hand, stages a modest recovery from the monthly low, though the upside seems limited amid worries that Trump's sweeping tax cuts and spending bill would worsen the US budget deficit. This, along with dovish Federal Reserve expectations, should cap the Greenback and the USD/JPY pair.
• Traders now look forward to the US economic docket – featuring the release of Durable Goods Orders and the Conference Board's Consumer Confidence Index. The focus, however, will remain glued to the FOMC minutes, the Prelim US Q1 GDP print, and the US Personal Consumption Expenditure (PCE) Price Index.
• Investors this week will also confront the release of Tokyo CPI on Friday, which will play a key role in influencing the JPY price dynamics. Nevertheless, the fundamental backdrop seems tilted in favor of the JPY bulls and suggests that the path of least resistance for the USD/JPY pair remains to the downside.

USD/JPY bulls look to build on intraday positive move beyond the 61.8% Fibo. retracement level; not out of the woods yet

From a technical perspective, the previous day's failure ahead of the 61.8% Fibonacci retracement level of the April-May rally and the subsequent slide favors the USD/JPY bears. Moreover, oscillators on the daily chart are holding in negative territory and are still far away from being in the oversold zone. This, in turn, supports prospects for a further near-term depreciating move for the currency pair.

Hence, any further move up could face stiff resistance near the 143.65 region, above which the USD/JPY pair could reclaim the 144.00 mark. A sustained strength beyond the latter could pave the way for further recovery, though the move up might still be seen as a selling opportunity near the 144.80 zone and remain capped near the 145.00 psychological mark.

On the flip side, the 143.00 mark could protect the immediate downside ahead of the 142.50-142.45 region. Meanwhile, bearish traders might now wait for a sustained break and acceptance below the 142.00 mark before placing fresh bets. The USD/JPY pair might then slide below the 141.55 intermediate support, towards the 141.00 round figure. The downward trajectory could extend further towards the year-to-date low, or levels below the 140.00 psychological mark touched on April 22.