Yesterday, the US currency appreciated across the board, but it still ended the trading session in negative territory against the yen. Why does the USD/JPY pair currently follow its own rules, and when will it start to align with the overall dynamics of the US dollar?

Bad streak for USD/JPY

This week, the US dollar is growing mainly thanks to the risk-off sentiment although concerns about a US default have noticeably cooled down, as a deal to raise the US debt ceiling may be approved in the coming days.

This time, the growing demand for the US dollar as a safe-haven asset is driven by China's uneven economic recovery. Recent weak economic data from China has heightened the risk of a global recession.

Against this backdrop, DXY jumped by 0.26% on Wednesday against a basket of major currencies. However, in the case of the yen, the greenback showed a negative trend.

At the end of yesterday's trading session, the USD/JPY pair fell by more than 0.3%, reaching the level of 139.3. This marks the third consecutive daily decline in the exchange rate.

The main reason for the pair's decline is the sudden warning from Japanese authorities about possible intervention.

Last week, the US dollar surged against the yen to a new 6-month high, as expectations of monetary divergence between the US and Japan increased in the market.

In response to this, the Japanese government held an emergency meeting on Tuesday. While discussing the situation in the financial market, the country's chief currency diplomat, Masato Kanda, warned that the authorities are closely monitoring developments and will respond accordingly if necessary.

The fear of intervention forced the dollar bulls to retreat, benefiting the yen. Since Monday, the JPY exchange rate has risen by 0.7% against the American currency.

Analysts explain yesterday's sell-off in USD/JPY by the decline in US government bond yields across the yield curve. The indicators sharply dropped as market expectations for the Federal Reserve's future policy stance noticeably weakened.

On Wednesday, investors ignored positive employment statistics from the US, focusing mainly on the dovish rhetoric of US central bank officials.

Yesterday, the member of the Federal Reserve Board of Governors, Philip Jefferson, and Philadelphia Fed President Patrick Harker stated the advisability of pausing the tightening on the upcoming FOMC meeting.

This led to a sharp shift in market sentiment. Currently, traders assess the probability of a June interest rate hike at only 26%, whereas the day before it was nearly 70%.

Meanwhile, many experts warn that in the coming days, investors may quickly change their forecasts, so the likelihood of the dollar's rise against the yen still remains.

What will bring USD/JPY back to life?

Economists at MUFG Bank believe that the official approval of the US debt ceiling agreement, which will further alleviate traders' concerns about default and recession, will bring more hawkish sentiment to the market.

However, the most convincing argument for investors in favor of a June rate hike should be tomorrow's jobs report in the US.

According to preliminary estimates, the number of nonfarm payrolls in May increased by 180,000 compared to the April reading of 253,000, while the unemployment rate rose to 3.5% from the previous month's 3.4%.

However, the JOLTS data on job openings published yesterday showed that experts may be wrong in their forecasts. According to statistics, in April, the indicator rose to 10.1 million, surpassing the expected 9.375 million.

If the May NFP release also exceeds consensus, it will leave no doubt among investors about the June tightening round.

"A stronger employment report will prompt traders to increase the probability of a rate hike at the Fed meeting scheduled for mid-June. Most likely, this will lead to further purchases of the USD/JPY pair," MUFG analysts said.

At the same time, experts warn that as the pair approaches the 145 level and above, the risk of currency intervention by Japanese authorities may significantly increase. If the Japanese government threatens speculators with intervention once again, it will push the USD/JPY pair back.

The current speculation about a possible correction in the yield curve control policy in Japan also poses a risk to the dollar/yen pair. If investors start speculating on this topic and betting on changes to YCC on the eve of the BOJ June meeting, the rise of the USD/JPY pair will be very limited despite the market's confidence in the hawkish intentions of the Federal Reserve.

As we can see, the future dynamics of the dollar against the yen can be very unstable. Many experts predict increased volatility for the major currency pair in the next two weeks, but most of them expect USD/JPY to remain predominantly in the green zone.

Technical outlook

At the start of the trading session on Thursday, USD/JPY made an attempt to rebound from the lower boundary of the short-term bullish pennant pattern and recorded a daily rise for the first time in the last four sessions.

However, the 50-day SMA near 139.50 and sell signals generated by the MACD indicator are challenging the dollar bulls. A clear breakout of the immediate support at 139.00 won't allow the formation of the upward movement and may push the quote to the May low of 138.75.

On the other hand, a break above 139.50 will confirm bullish momentum. In this case, the next upward target for bulls will become the level of 140 and then the 6-month high of 140.93.