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The Japanese Yen dropped in Asia, while other majors remained flat to positive against the greenback despite the continued rise in the treasury yields. The market action suggests the risk assets could trade on the front foot in Europe.

The argument has merit as the AUD/JPY pair, which is widely considered as a risk barometer, rose to 83.40 in Asia – the highest level since April 19. It seems the markets have taken heart from the reports stating that China has offered to cut its annual trade surplus with the US by $200 billion.

It is worth noting that 10-year treasury yield rose to 3.128 percent in Asia – the highest level since July 2011. Still, as noted above, the dollar failed to score against most majors, which indicates the overbought conditions as shown by the 14-day relative strength index (RSI) are coming into play. Thus, oversold pairs like EUR/USD, GBP/USD could correct higher.

The JPY crosses may post stellar gains as equities are likely to cheer easing US-China trade tensions. Further, European desks may also offer Yen in response to dismal Japanese core inflation reading. Moreover, the data have reinforced expectations that BOJ is miles away from beginning the policy normalization process. The good news for Yen bears does not end here. The rising treasury yields could put upward pressure on the Japanese government bond (JGB) yields and thus BOJ may have to buy more bonds (Yen bearish) in order to keep the 10-year JGB yield at zero percent.

What’s brewing in the majors?

EUR/USD: Corrective rally likely

The RSI has diverged in the EUR positive manner. Further, the RSI has shown oversold conditions since May 2. So, an uptick cannot be ruled out, but will likely be short-lived as the yield differential is rising in the EUR-negative manner and the 5-day moving average (MA) and the 10-day MA is biased bearish.

GBP/USD:  200-day MA is a magnet

The pair could have a relook at the 200-day MA located at 1.3558 as the RSI shows oversold conditions and bullish divergence. However, only a close above 1.3618 would confirm a short-term bottom. Brexit related news flow will likely guide the pair ahead of the next week’s inflation figures.

USD/JPY: 14-day RSI enters the overbought zone

As discussed above, the fundamentals offer little hope for the Yen bulls. However, the RSI on the USD/JPY daily chart has moved well above 70.00, indicating overbought conditions. So, the pair may have a tough time clearing the resistance at 111.32 (76.4 percent Fibonacci retracement of  Jan-Mar drop).

Major news

  • China bowing down to Trump’s demand of a $200 billion cut in China’s U.S. trade surplus
  • Japan’s core CPI slowed in April for a second straight month
  • US fund investors hike stock exposure by most since March – Lipper
  • US’ Lighthizer: NAFTA talks “going nowhere” – Reuters
  • China local govt firm fails to repay $629 mln loans in rare default: sources – Reuters News
  • Macron and Merkel want an ‘unlimited’ exemption from Trump’s steel tariffs
  • No Brexit deal scenario is a “serious possibility” – Irish PM News
  • No BAFTA’s for NAFTA play writers today, and here’s why
  • China / U.S. launch ‘part deux’ of trade talks to avert tariff war