Ella 
USD/JPY edged higher, posting its first loss in three days.
Light data, market preparations for U.S. inflation and previous risk aversion challenged the pair’s bulls.
Yields remained under pressure as participants piled into Treasuries amid deteriorating market sentiment.
Fed needs strong U.S. inflation data to defend hawks and USD/JPY bulls, eye on U.S. inflation on Thursday.
Entering the European session on Wednesday, USD/JPY is still under pressure around 143.00, recording the first day of decline in three days.
It’s worth pointing out, however, that even if the dollar pared earlier gains amid a shift in risk sentiment, the pair’s latest momentum could result in no price action. Market preparations for top U.S.-Japan inflation data also challenged the pair as a risk barometer.
Improvements in Chinese factory inflation (PPI) and news from the Biden administration were positive for risk sentiment, dampening previous pessimism in the market and giving bulls a break.
A surprise move by Italy to tax bank windfall profits and downgrades of U.S. banks and financial institutions by global rating agencies weighed on market sentiment on Tuesday and fueled gains in USD/JPY. Also worrisome are a recession in Britain and slower growth in China, as well as Beijing’s geopolitical tensions with Japan and the United States.
On the other hand, the recent subdued performance of US and Japanese government bond yields and concerns about tensions between China and Japan due to Tokyo’s friendly relations with Taiwan also seemed to weigh on USD/JPY.
Still, U.S. 10-year Treasury yields remained pressured at around 4.0% from a one-week low hit the previous day, while 10-year Japanese government bonds (JGB) fell to their lowest level in eight days by press time , was 0.58%.
It is worth pointing out that the decline in Japanese bond yields defended the Bank of Japan’s loose monetary policy, while the softer U.S. bond yields and the slight decline in S&P 500 futures dragged the dollar index down from the 10-week falling resistance line.
Looking ahead, a sustained decline in U.S. bond yields could allow USD/JPY to consolidate its gains this week ahead of Thursday’s Japanese PPI and U.S. July CPI data.
