USD/JPY weakens as soft US data and dovish Fed tone bolster Yen demand

• USD/JPY slips below 146.10 as risk-off flows and narrowing yield spreads support Yen strength.
• Fed Chair Powell's dovish tone and soft US data fuel expectations of earlier policy easing.
• Japan's Q1 GDP in focus; a stronger print may intensify the downside pressure on USD/JPY.

The Japanese Yen (JPY) is gaining ground against the US Dollar (USD) in Thursday's US session, with USD/JPY extending its downward trajectory amid sustained pressure on the Greenback. 

The decline reflects a confluence of bearish factors for the US Dollar, including weaker-than-expected US economic data, dovish messaging from the Federal Reserve (Fed), softening US Treasury yields, and a broader shift toward safe-haven assets such as the Yen.

At the time of writing, USD/JPY is trading around 145.75, representing a 0.68% decline from the previous session's close. The move underscores heightened investor caution and a prevailing risk-off tone, as markets increasingly price in the prospect of a decelerating US economic outlook.

Fed pivot signals, weak US data weigh on the US Dollar as yield advantage narrows

Thursday's data releases from the United States painted a picture of weakening momentum. Retail Sales for April rose by just 0.1%, beating market expectations but falling short of the previous month's reading of 1.5%, suggesting consumers are beginning to pull back. Meanwhile, the Producer Price Index fell by 0.5% on a monthly basis, signaling further moderation in inflation at the wholesale level. Together, the figures raise red flags about underlying demand and support the view that inflationary pressures are fading more quickly than anticipated.

This backdrop has prompted markets to reassess the Federal Reserve's policy trajectory. When addressing the markets in a highly anticipated speech, Fed Chair Jerome Powell acknowledged that inflation is "evolving more favorably" and emphasized the central bank's flexibility to respond if incoming data continues to soften. 

His tone marked a notable shift from recent Fed communication, which had largely emphasized patience and caution. Traders interpreted Powell's remarks as laying the groundwork for potential rate cuts, pulling US yields lower and weighing further on the US Dollar.

Focus shifts to Japanese GDP as market gauges BoJ policy risk

The yield on the 10-year US Treasury note declined to 4.45%, reflecting reduced expectations for additional tightening and amplifying pressure on USD/JPY. 

With the yield differential between the US Dollar and the Yen narrowing, the incentive to hold USD-denominated assets has weakened. In turn, the Yen is drawing strength as investors rotate into safer positions.

This shift in the macro landscape has triggered a clear change in market positioning, with momentum now favoring further downside in the pair. Volatility is likely to remain elevated in the near term, especially as investors await key Japanese economic data that could influence the pair's next leg.

Attention now turns to Japan's preliminary Q1 Gross Domestic Product (GDP) release, due Thursday at 23:50 GMT. Forecasts point to a slight 0.1% QoQ contraction. A weaker-than-expected reading could temper some of the Yen's recent gains by reinforcing the Bank of Japan's cautious stance. On the other hand, a stronger print may validate the recent shift in sentiment and open the door to further downside in USD/JPY.