The USD/JPY pair builds on the previous day’s rebound from the 131.65 area and touches a three-day high on Friday, though lacks bullish conviction. The pair manages to hold steady around mid-132.00s through the early European session as traders keenly await the US Personal Consumption Expenditure (PCE) data before placing fresh directional bets.
The Fed’s preferred inflation gauge, the Core PCE Price Index is due for release later during the early North American session and will provide fresh cues on inflationary pressures. This, in turn, should play a key role in influencing the next policy move by the Fed and help determine the next leg of a directional move for the US Dollar. Heading into the key data risk, investors prefer to wait on the sidelines, leading to subdued range-bound price action around the USD/JPY pair.
The downside, meanwhile, remains cushioned amid a recovery in the global risk sentiment, which tends to undermine the safe-haven Japanese Yen. Apart from this, a further rise in the US Treasury bond yields, bolstered by reviving bets for a more aggressive policy tightening by the Fed, acts as a tailwind for the USD and lends some support to the USD/JPY pair.
Against the backdrop of a more hawkish commentary by the Fed last week, the upbeat US macro data released on Thursday fueled speculations that the US central bank will have to stick to its hawkish stance to tame inflation.
This, in turn, pushes the yield on the benchmark 10-year US government bond closer to the monthly top. The resultant widening of the US-Japan rate differential could contribute to driving flows away from the JPY and supports prospects for some meaningful upside for the USD/JPY pair.
That said, the Bank of Japan’s recent policy tweak, widening the range for fluctuations in the 10-year government bond yield, benefits the JPY and warrants caution for bullish traders. Hence, it will be prudent to wait for strong follow-through buying before confirming that spot prices have bottomed out.