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USD/JPY forecast: RSI flirts with overbought zone ahead of US CPI

USD/JPY trades to a fresh yearly high after clearing the opening range for October; the move back above 70 in the RSI is likely to be accompanied by a further appreciation in the exchange rate.

Source: Bloomberg

USD/JPY registers the longest stretch of gains since April as it rallies for six consecutive days, and the exchange rate may continue to trade to fresh yearly highs ahead of the update to the US Consumer Price Index (CPI) as long as the RSI holds in overbought territory.

Source: DailyFX

Looking ahead, fresh figures coming out of the US Bureau of Labor Statistics (BLS) may fuel the recent advance in USD/JPY as the core CPI is projected to increase for the second month, with the figure expected to widen to 6.5% in September from 6.3% per annum the month prior.

Another uptick in the core CPI may put pressure on the Federal Reserve to retain its approach in combating inflation as minutes from the September meeting reveals that “many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action,” and USD/JPY may continue to track the positive slope in the 50-Day SMA (140.53) ahead of the next Federal Open Market Committee (FOMC) interest rate decision on November 2 as Chairman Jerome Powell and Co. pursue a restrictive policy.

Until then, the diverging paths between the Fed and Bank of Japan (BoJ) may keep USD/JPY afloat as Governor Haruhiko Kuroda and Co. stick to Quantitative and Qualitative Easing (QQE) with Yield-Curve Control (YCC), while the tilt in retail sentiment looks poised to persist as traders have been net-short the pair for most of the year.

Source: DailyFX

The IG Client Sentiment (IGCS) report shows 22.67% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 3.41 to 1.

The number of traders net-long is 13.08% higher than yesterday and 17.07% higher from last week, while the number of traders net-short is 2.09% lower than yesterday and 11.27% higher from last week. The rise in net-long interest has helped to alleviate the crowding behavior as only 21.49% of traders were net-long USD/JPY earlier this week, while the rise in net-short position comes even as the exchange rate trades to a fresh yearly high (146.97).

With that said, the update to the US CPI may fuel a further advance in USD/JPY should the development boost speculation for another 75bp Fed rate hike, and the exchange rate may continue to carve a series of higher highs and lows as long as the Relative Strength Index (RSI) holds in overbought territory.

USD/JPY rate daily chart

Source: TradingView

This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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