- USD/JPY witnessed aggressive selling following the release of the US consumer inflation figures.
- A sharp pullback in the US bond yields prompted USD profit-taking and exerted some pressure.
- The widening US-Japanese bond yield differential acted as a tailwind and helped limit losses.
The USD/JPY pair quickly reversed the post-US CPI low to a fresh daily low and was last seen trading in neutral territory, around the 125.25-125.30 region.
The pair retreated from the vicinity of the multi-year peak, around the 125.75 region and fell nearly 100 pips during the early North American session on Tuesday. The USD witnessed a typical "buy the rumour, sell the news" trade following the release of the US consumer inflation figures.
The headline CPI accelerated to 8.5% YoY in March from the 7.9% previous, while the core CPI missed expectations and rose 6.5% YoY during the reported month. The data was not as bad as feared and forced investors to scale back their expectations for a more aggressive policy tightening by the Fed.
This was evident from a sharp pullback in the US Treasury bond yields, which, in turn, prompted the USD bulls to take some profits off the table and exerted downward pressure on the USD/JPY pair. That said, a strong rally in the equity markets undermined the safe-haven JPY and helped limit losses.
Moreover, investors remain concerned that the recent surge in commodity prices would put upward pressure on already high consumer prices. This should act as a tailwind for the US bond yields ad supports the prospect of the emergence of some USD dip-buying and lend support to the USD/JPY pair.
Conversely, caution around the BoJ's intervention to defend its 0.25% yield target should cap the Japanese government bond. The resultant widening of the US-Japanese government bond yield differential suggests that any fall should continue to attract fresh buyers around the USD/JPY pair.
