Ella 
USD/JPY opened lower on Monday, but there was a lack of follow-through selling.
The US PCE price index was weak on Friday, with bulls on the defensive and under pressure.
The upbeat market sentiment dampened the risk-off sentiment in the yen, providing support for USD/JPY.
USD/JPY rallied more than 300 pips from an intraday low of around 138.00, or a one-and-a-half-week low, on Friday, but the recovery was unsustainable and Monday’s opening was weak. USD/JPY remains on the defensive in Asia and is currently trading around 140.80-140.75, down 0.25% for the day.
The greenback traded lower on Monday, seen as a key factor for USD/JPY, amid signs of waning underlying price pressures. In fact, the U.S. Bureau of Economic Analysis reported that the U.S. PCE price index rose 0.2% last month in June and was up 3.0% on the year, the smallest gain since March 2021. Excluding the volatile food and energy components, U.S. core PCE prices rose at an annual rate of 4.1%, the smallest gain since September 2021. That, along with reports earlier this month suggesting a further slowdown in consumer prices, could prompt the Federal Reserve to end its most aggressive cycle of rate hikes since the 1980s, putting dollar bulls on the defensive.
Still, strong U.S. GDP points to a remarkably resilient U.S. economy, raising the prospect of further rate hikes by the Federal Reserve. It is worth recalling that Fed Chairman Jerome Powell said last week that the economy still needs to slow and the labor market remains weak for inflation to return to its 2% target. That leaves the door open for a 25 basis point hike in September or November, which remains supportive of rising U.S. Treasury yields and should help limit the dollar’s downside. In addition to this, optimistic market sentiment may weaken the safe-haven function of the Japanese yen (JPY) and provide support for the USD/JPY currency pair, so aggressive bearish traders should proceed with caution and invest in USD/JPY short-term Refresh and prepare for declines.
Meanwhile, markets appear to have priced in a hawkish move by the Bank of Japan (BoJ) to make its yield curve control (YCC) policy flexible on Friday. The central bank said the 0.5% cap on 10-year JGB yields would now be a “reference” rather than a “hard limit” and that the central bank would intervene in the market when bond yields hit 1.0%. This was seen as a step towards ending the BOJ’s dovish stance, although the immediate market reaction was short-lived. This in turn suggests that the path of least resistance for USD/JPY is to the upside, with subsequent dips likely to be seen as buying opportunities. Traders are now looking to the release of key U.S. macro data as the week kicks off in August, including non-farm payrolls, for some tangible impetus.
