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USD/JPY Recovery Emerges Ahead of Federal Reserve Rate Decision

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Japanese Yen Talking Points

USD/JPY extends the advance from the start of the week as US Treasury yields push to fresh yearly highs, and the exchange rate may continue to retrace the decline from the yearly high (144.99) as the Federal Reserve is expected to deliver another 75bp rate hike.

USD/JPY Recovery Emerges Ahead of Federal Reserve Rate Decision

USD/JPY appears to be stuck in a narrow range as the Relative Strength Index (RSI) falls back from overbought territory, but the Federal Open Market Committee (FOMC) interest rate decision may generate a breakout in the exchange rate as the Bank of Japan (BoJ) sticks to its easing cycle.

As a result, a 75bp rate Fed rate hike paired with a hawkish forward guidance may fuel the recent rebound in USD/JPY, and the update to the Summary of Economic Projections (SEP) may reinforce a bullish outlook for the exchange rate should Chairman Jerome Powell and Co. continue to forecast a steeper path for US interest rates.

In turn, the diverging paths for monetary policy may keep USD/JPY afloat as the FOMC pursue a restrictive policy, while the tilt in retail sentiment looks poised to persist as traders have been net-short the pair for most of 2022.

The IG Client Sentiment report shows 28.21% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 2.55 to 1.

The number of traders net-long is 6.80% higher than yesterday and 30.45% higher from last week, while the number of traders net-short is 0.57% lower than yesterday and 1.91% higher from last week. the rise in net-long interest has alleviated the crowding behavior as only 26.55% of traders were net-long USD/JPY last week, while the marginal rise in net-short position comes as the exchange rate trades within the monthly range.

With that said, USD/JPY may continue to retrace the decline from the yearly high (144.99) if the FOMC delivers a hawkish rate hike, and a move above 70 in the Relative Strength Index (RSI) is likely to be accompanied by a near-term rally in the exchange rate like the price action from earlier this month.

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USD/JPY Rate Daily Chart

Source: Trading View

  • USD/JPY appears to be stuck in a narrow range after failing to clear the monthly high (144.99), with the Relative Strength Index (RSI) falling back from overbought territory during the same period as the exchange rate consolidates.
  • Failure to defend the 141.70 (161.8% expansion) area raises the scope for a larger pullback in USD/JPY, with a move below the 140.30 (78.6% expansion) region bringing the monthly low (138.84) on the radar.
  • Nevertheless, USD/JPY may continue to carve a series of higher highs and lows as it trades back above the 143.00 (4.236% expansion) handle, with a break/close above the 144.10 (100% expansion) region bringing the yearly high (144.99) back on the radar.
  • Next area of interest comes in around the August 1998 high (147.67), with a break/close above the 150.00 (38.2% retracement) handle opening up the August 1990 high (151.65).

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong



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