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• The Japanese Yen attracts heavy intraday sellers as the trade optimism undermines safe-haven demand.
• Japan’s strong Services PPI reaffirms BoJ rate hike bets and should limit any meaningful JPY depreciation.
• Dovish Fed expectations should cap the attempted USD recovery and act as a headwind for the USD/JPY.

The Japanese Yen (JPY) weakens across the board following the Asian session move higher, which, along with a recovering US Dollar (USD), assists the USD/JPY pair to rebound sharply from over a one-month low. Investors continue to cheer US President Donald Trump's decision to delay imposing tariffs on the European Union (EU), which, in turn, is seen undermining safe-haven assets, including the JPY. However, the uncertainty around Trump's trade policies might keep a lid on the market optimism.

Apart from this, the growing acceptance that the Bank of Japan (BoJ) will hike interest rates again this year should contribute to limiting deeper JPY losses. In contrast, bets that the Federal Reserve (Fed) will lower borrowing costs further in 2025, along with concerns about the worsening US fiscal condition, should cap the USD recovery. This, in turn, warrants caution before placing aggressive bullish bets around the USD/JPY pair and confirming that spot prices have bottomed out in the near term.

Japanese Yen attracts some intraday selling amid receding safe-haven demand; downside seems cushioned
 

• 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 boosts the Japanese Yen and drags 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 buck 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 needs to surpass 61.8% Fibo. retracement level support breakpoint for bulls to retain intraday control
 

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. Some follow-through selling below the 142.00 mark will reaffirm the outlook and drag spot prices 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.

On the flip side, any attempted recovery might now face stiff resistance near the 143.00 round figure. This is closely followed by the 143.25 area, or the 61.8% Fibo. retracement level, which if cleared decisively could trigger a fresh bout of a short-covering and lift the USD/JPY pair to the 143.65 region en route to 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.

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