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USD/JPY reverses ahead of monthly low with Fed rate hike on tap

USD/JPY halts the series of lower highs and lows from last week to largely mirror the rebound in US Treasury yields, and the Federal Reserve interest rate decision may lead to a near-term advance in the exchange rate.

Source: Bloomberg

USD/JPY reverses ahead of monthly low with FED rate hike on tap

USD/JPY (大口) appears to be stuck in the monthly range as the Bank of Japan (BoJ) sticks to the Quantitative and Qualitative Easing (QQE) program with Yield Curve Control (YCC), but the exchange rate may continue to track the positive slope in the 50-Day SMA (133.68) as the Federal Open Market Committee (FOMC) is expected to deliver another 75bp rate hike.

Source: DailyFX

The diverging paths between the Fed and BoJ should keep USD/JPY afloat as Chairman Jerome Powell and Co. show a greater willingness to implement a restrictive policy, and the exchange rate may stage another attempt to test the September 1998 high (139.91) as long as the FOMC stays on course to implement higher interest rates throughout the remainder of the year.

However, the threat of a recession may push the FOMC to winddown its hiking cycle as the central bank tries to achieve a soft-landing for the US economy, and a shift in the Fed’s forward guidance may produce a bearish reaction in the US dollar if the central bank looks to hold the benchmark interest rate at neutral for the remainder of the year.
In turn, the outlook for Fed policy may ultimately influence USD/JPY as the BoJ remains reluctant to switch gears, but the tilt in retail sentiment looks poised to persist as traders have been net-short the pair for most of 2022.

Source: DailyFX

The IG Client Sentiment report shows 32.87% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 2.04 to 1.

The number of traders net-long is 0.27% lower than yesterday and 17.20% higher from last week, while the number of traders net-short is 8.37% higher than yesterday and 13.03% lower from last week. The jump in net-long interest has helped to alleviate the crowding behavior as 28.86% of traders were net-long USD/JPY last week, while the decline in net-short position comes as the exchange rate halts the series of lower highs and lows from last week.

With that said, USD/JPY may stage a larger advance over the coming days as the FOMC is expected to deliver another 75bp rate hike, and the exchange rate may stage another attempt to test the September 1998 high (139.91) as it appears to be reversing course head of the monthly low (134.70).

USD/JPY rate daily chart

Source: TradingView

Summary

  • USD/JPY snaps the series of lower highs and lows from last week as it holds above the monthly low (134.70), and the exchange rate may continue to exhibit a bullish trend as the 50-Day SMA (133.68) reflects a positive slope.
  • Lack of momentum to break/close below the 135.30 (50% expansion) area may push USD/JPY back above the 137.40 (61.8% expansion) to 137.80 (316.8% expansion) region, with a break above the monthly high (139.39) bringing the September 1998 high (139.91) back on the radar.
  • However, failure to defend the monthly low (134.70) may lead to a test of the 50-Day SMA (133.68), with the next area of interest coming in around 132.20 (78.6% retracement) to 133.20 (38.2% expansion).

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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