Yen Firms on Risk-Off Flows, But BoJ Stance Caps Gains

 Key Takeaways:

*USD/JPY dips as U.S. yields retreat on soft CPI, reviving Fed rate cut bets.

*Geopolitical tensions in the Middle East spark modest haven demand for the yen.

*BoJ dovishness and record-high JGB yields limit broader yen strength.

Market Summary:

USD/JPY edged lower this week, pulling back from recent highs as cooling U.S. inflation and rising geopolitical tensions boosted modest haven demand for the yen. The pair slipped below 145.00, tracking a retreat in Treasury yields after May core CPI rose just 0.1% MoM—undershooting expectations and reinforcing a more cautious Fed outlook. The 10-year yield settled near 4.45%, with rate cut odds for September holding near 50%.

Geopolitical risks have intensified, weighing on broader risk sentiment. The U.S. ordered evacuations at embassies in Iraq, Bahrain, and Kuwait amid stalled nuclear negotiations with Iran, and President Trump voiced doubts over securing a deal. Tehran threatened retaliatory action if tensions escalate, while the IAEA is reportedly preparing to censure Iran—raising the risk of UN sanctions and regional instability.

Despite the uptick in risk aversion, yen strength remains capped by persistent BoJ dovishness. Japanese officials continue to signal no near-term tightening, with recent polls suggesting a rate hike pause until 2026 due to global tariff uncertainty. Meanwhile, 30-year JGB yields spiked to a record 2.10% amid growing supply concerns, highlighting local bond market stress even as global volatility drives near-term USD/JPY moves.

Trade talks between the U.S. and China offered fleeting support, with negotiators reportedly agreeing to a framework on rare earth exports and tariff stability. However, with no structural deal in place and China reluctant to shrink its trade surplus, market sentiment remains fragile.

Technical Analysis

USDJPY, H4

USD/JPY continues to trade under pressure after repeated failures to hold above the 145.10 resistance level, with price now drifting below both horizontal resistance and a descending trendline. This weakening structure follows a short-lived rebound that failed to generate sustained bullish momentum, raising the prospect of further downside as bearish pressure builds. While price remains marginally supported above 144.00, the lack of follow-through from buyers introduces growing technical fragility.

Momentum indicators are skewing bearish. The Relative Strength Index (RSI) has slipped to 57, rolling over from recent highs and indicating fading bullish strength despite remaining above the neutral 50 mark. Meanwhile, the MACD has formed a bearish crossover, with the MACD line crossing below the signal line and momentum bars beginning to flip negative.

From a structural perspective, USD/JPY faces a critical test. Failure to hold above 142.65 may lead to a breakdown toward the next support at 141.70. Upcoming sessions will be key in confirming whether the pair is entering a broader corrective phase or merely consolidating within a weakening range.

Resistance Levels:145.10, 146.20
Support Levels: 142.65, 141.70