Japanese Yen Talking Points
USD/JPY appeared to be on track to test the 2015 high (125.86) after clearing the 2016 high (121.69) last week, but a move below 70 in the Relative Strength Index (RSI) is likely to be accompanied by a near-term correction in the exchange rate as the oscillator offers a textbook sell signal.
USD/JPY Rate Outlook Susceptible to RSI Sell Signal
USD/JPY pulls back from a fresh yearly high (125.11) to largely track the recent weakness in longer-dated US Treasury yields, but fresh data prints coming out of the US may keep the exchange rate afloat as the Federal Reserve’s preferred gauge for inflation is expected to increase for the sixth consecutive month.
The core US Personal Consumption Expenditure (PCE) Price Index is projected to widen to 5.5% from 5.2% per annum in January, which would mark the highest reading since 1983, and evidence of persistent inflation along with a further improvement in the labor market may encourage the Federal Open Market Committee (FOMC) to normalize monetary policy at a faster pace as Non-Farm Payrolls (NFP) are anticipated to expand 490K in March.
As a result, Chairman Jerome Powell and Co. look poised to adjust the exit strategy as St. Louis Fed President James Bullard, who votes on the FOMC this year, argues that the central bank “needs to move aggressively to keep inflation under control,” and the central bank may embark on quantitative tightening (QT) at its next interest rate decision on May 4 as “the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.”
Until then, USD/JPY may continue to exhibit a bullish trend amid the diverging paths between the FOMC and Bank of Japan (BoJ), but a further rise in the exchange rate is likely to fuel the tilt in retail sentiment like the behavior seen during the previous year.
The IG Client Sentiment report shows only 23.57% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 3.24 to 1.
The number of traders net-long is 5.47% lower than yesterday and 7.79% higher from last week, while the number of traders net-short is 1.36% higher than yesterday and 4.67% lower from last week. The rise in net-long interest has helped to alleviate the crowding behavior as 21.42% of traders were net-long USD/JPY last week, while the decline in net-short position could be a function of stop-loss orders getting triggered as the exchange rate trades to fresh yearly highs in March.
With that said, USD/JPY may stage another attempt to test the 2015 high (125.86) as fresh data prints coming out of the US are anticipated to show rising inflation along with a further improvement in the labor market, but a move below 70 in the Relative Strength Index (RSI) is likely to be accompanied by a near-term correction in the exchange rate as the oscillator offers a textbook sell signal.
USD/JPY Rate Daily Chart
Source: Trading View
- USD/JPY appeared to be on track to test the 2015 high (125.86) as it rallied to a fresh yearly high (125.11), with the appreciation in the exchange rate pushing the Relative Strength Index (RSI) into overbought territory for the second time in 2022.
- However, USD/JPY appears to be reversing ahead of the 2015 high (125.86) as it snaps the series of higher highs and lows from last week, and lack of momentum to hold above the 122.40 (78.6% retracement), region may push the exchange rate back towards the 121.50 (23.6% expansion) area as the bullish momentum seems to be abating.
- In turn, a move below 70 in the RSI is likely to be accompanied by a near-term correction in USD/JPY as the oscillator offers a textbook sell signal, with a break/close below the Fibonacci overlap around 120.90 (50% expansion) to 121.50 (23.6% expansion) bringing the 120.00 (38.2% expansion) handle back on the radar.
- At the same time, USD/JPY may stage another attempt to test the 2015 high (125.86) as long as the RSI holds in overbought territory, with a move above the 126.20 (78.6% expansion) area opening up the May 2002 high (129.09).