USD/JPY Rate Forecast: Test of August High on Tap

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Japanese Yen Talking Points

USD/JPY appears to have reversed course ahead of the monthly low (130.39) as it extends the series of higher highs and lows from earlier this week, and the exchange rate may continue to appreciate over the coming days as it looks poised to test the monthly high (135.58).

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USD/JPY Rate Forecast: Test of August High on Tap

USD/JPY seems to mirroring the rise recovery in US Treasury yields as it attempts to retrace the decline following the Federal Open Market Committee (FOMC) Minutes, and the exchange rate may continue to track the positive slope in the 50-Day SMA (135.38) if it manages to climb above the moving average.

It seems as though the diverging path between the Bank of Japan (BoJ) and Federal Reserve will keep USD/JPY afloat as Chairman Jerome Powell and Co. “anticipate that ongoing increases in the target range for the federal funds rate would be appropriate,” and the FOMC may continue to strike a hawkish forward guidance over the coming months as “participants judged that moving to a restrictive stance of policy was required to meet the Committee’s legislative mandate to promote maximum employment and price stability.”

As a result, a growing number of Fed officials may project a higher trajectory for US interest rates as the central bank is slated to update the Summary of Economic Projections (SEP) at the next interest rate decision on September 21, but the FOMC may adjust its approach in combating inflation as the committee acknowledges that “it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation.

Until then, USD/JPY may continue to retrace the decline from the yearly high (139.39) as it looks poised to test the monthly high (135.58), while the tilt in retail sentiment looks poised to persist as traders have been net-short the pair for most of the year.

Image of IG Client Sentiment for USD/JPY rate

The IG Client Sentiment report shows 31.52% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 2.17 to 1.

The number of traders net-long is 8.91% lower than yesterday and 13.34% lower from last week, while the number of traders net-short is 9.34% higher than yesterday and 23.57% higher from last week. The decline in net-long position comes as USD/JPY trades to a fresh weekly high (135.50), while the rise in net-short interest has fueled the crowding behavior as 37.61% of traders were net-long the pair last week.

With that said, recent price action raises the scope for a further advance in USD/JPY as it extends the series of higher highs and lows from earlier this week, and the exchange rate may continue to track the positive slope in the 50-Day SMA (135.38) if it manages to trade above the moving average.

USD/JPY Rate Daily Chart

Image of USD/JPY rate daily chart

Source: Trading View

  • USD/JPY appears to have reversed course ahead of the monthly low (130.39) amid the string of failed attempts to close below the Fibonacci overlap around 132.20 (78.6% retracement) to 133.20 (38.2% expansion), with the exchange rate approaching the monthly high (135.58) as it extends the series of higher highs and lows from earlier this week.
  • Need a close above 135.30 (50% expansion) to bring the 137.40 (61.8% expansion) to 137.80 (361.8% expansion) region on the radar, and the exchange rate may track the positive slope in the 50-Day SMA (135.38) if it manages to trade above the moving average.
  • A break above the yearly high (139.39) may spur another run at the September 1998 high (139.91), with the next area of interest coming in around 140.30 (78.6% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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