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With declining cross-market volatility and the funding nature of the JPY, there's mounting pressure on the yen. Short-term speculative sentiments appear to be leaning towards testing the tolerance of Japanese authorities for a weaker yen.

Indeed, the recent surge in Japanese retail traders flocking to the MXN/JPY carry trade, which has seen a return of 2% since the weekend, is a wonton disregard for potential intervention in the market. This behaviour, coupled with the declining cross-market volatility and the funding nature of the JPY, is exerting mounting pressure on the yen.

Short-term speculative sentiments are leaning towards testing the resolve of Japanese authorities for a weaker yen.

Market participants remain skeptical about the potential for USD/JPY to turn lower following the probable intervention last week. Comments from Governor Ueda yesterday had little impact on market sentiment.

Ueda recently met with PM Kishida to discuss the recent changes in monetary policy. In his statements, Ueda indicated that he would "closely monitor" the impact of yen movements on the outlook for inflation in Japan. Importantly, Ueda went further in today's comments, stating that "Foreign exchange rates make a significant impact on the economy and inflation," and adding that "Depending on those moves, a monetary policy response might be needed." This signals a definitive escalation in the communication to the markets that an FX move can and likely will prompt a policy response from the Bank of Japan.

Given this context, we executed a sell order on USD/JPY at 155.25, only to buy it back for a minimal profit after the market failed to make a move back below 155. In such an environment, we prefer to leave limit orders below key levels rather than attempting to pick tops. Getting knocked into trades, as we experienced and suggested last week, can prove to be extremely profitable in these interventionists but timing uncertain conditions.

In terms of data, we're currently in a relatively quiet period leading up to the CPI report on May 15th, and it's unlikely that any commentary from the Fed will significantly impact the market. Yesterday, Neel Kashkari, who tends to lean more hawkish, published a note discussing the actual tightness of policy and suggesting a structurally higher neutral rate post-pandemic. In an interview, he also mentioned that another hike cannot be entirely ruled out, yet US yields rallied despite this perspective as rates and  FX traders are in data dependency not in Fed commentary mode moving ahead after Powell confirmed the Fed dovish bias

US Treasuries maintain their rally following the lacklustre April US jobs report, while the broad US dollar index has stabilized around the 105 level. This stability persists despite European data surprises that support the recent narrative of an improving economic outlook.

As I mentioned earlier this week, "The Coming Days Might See Market Bears In Hibernation”, bullish momentum appears to be continuing, with the 10-year US Treasury yield reaching around 4.43% yesterday. Bunds also traded closely in line, with the 10-year yield falling towards 2.42%. However, this synchronicity seems to be keeping the Euro in check.

And like stock pickers, forex traders are already looking ahead to next week's inflation data, which could potentially shape the dollar's next directional move.

Feeling somewhat isolated in our perspective, we maintain our expectation for the US dollar to weaken. However, to see our forecast of three Fed rate cuts materialize, we would likely need an in-line or preferably softer CPI reading next week.

For the record, and to put money where our view is, we took advantage of this morning's dip to buy EURUSD.

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