During the early North American session, the USD/JPY pair experienced significant selling pressure and dropped to a three-day low, reaching around the 132.00 round-figure mark in the last hour.
The decline in the pair was attributed to several factors, including the weaker US Dollar (USD) due to the US Producer Price Index (PPI) and the Federal Reserve’s (Fed) monetary tightening.
The US PPI release indicates that disinflation is progressing smoothly and could even accelerate. This reaffirms expectations that the Fed will complete its monetary tightening after the upcoming hike next month and contributes to the USD’s weakness across the board.
The Federal Open Market Committee’s (FOMC) meeting minutes from March also revealed that several policymakers considered pausing interest rate increases, which could lead to a decline in US Treasury bond yields and a further narrowing of the US-Japan rate differential.
The prospect of a pause in the Fed’s rate-hiking cycle, coupled with looming recession risks, benefits the safe-haven Japanese Yen (JPY), contributing to the heavily offered tone surrounding the USD/JPY pair.
However, the Bank of Japan’s (BoJ) dovish near-term outlook may keep the JPY’s gains in check and prevent traders from placing aggressive bearish bets on the USD/JPY pair, at least for now.
Despite surrendering a significant portion of the weekly gains, spot prices remain subject to USD price dynamics. Additionally, short-term trading opportunities may arise based on US bond yields and broader risk sentiment ahead of the monthly Retail Sales data release on Friday.