Yen to Benefit from Easing Fed Expectations, Waning Risk Sentiment

Fundamental Forecast for Japanese Yen: Bullish

USD/JPY struggles to preserve the advance from earlier this month amid the slew of mixed data prints coming out of the world’s largest economy, and the pair stands at risk for a larger pullback as there appears to be a potential shift in risk sentiment.

Even though the Federal Open Market Committee (FOMC) is widely anticipated to raise the benchmark interest rate by 25bp in June, market participants appear to be taming the longer-term outlook for monetary policy following the lackluster developments, with Fed Fund Futures now pricing a 50% probability for a December rate-hike. In turn, waning interest-rate expectations may keep dollar-yen capped over the near-term, and the failed attempt to test the March high (115.50) may open up the downside targets as the rebound from the April low (1.08.13) shows signs of exhaustion.

With limited data prints on tap for the week ahead, major market themes may sway the USD/JPY exchange rate especially as the global community of investors utilize the Japanese Yen as a funding-currency. Indeed, the recent pickup in risk appetite seems to be tapering off as global benchmark equity indices pullback from fresh 2017-highs, and a more material shift in market sentiment may heighten the appeal of the lower-yielding currency as it drags on carry-trade interest.

USD/JPY Daily Chart

The broader outlook for USD/JPY has perked up as the exchange rate breaks out of the downward trend carried over from late-2016, but the pair stands at risk for a near-term correction as it fails to retain the bullish formation from April, with the Relative Strength Index (RSI) highlighting a similar behavior. As a result, the lack of momentum to test the March high (115.50) may open up the downside targets, with the first area of interest coming in around 112.40 (61.8% retracement) to 112.80 (38.2% expansion) followed by 111.10 (61.8% expansion) to 111.60 (38.2% retracement). Check out the Quarterly DailyFX Forecasts for additional trading ideas.

Retail trader data shows 48.4% of traders are net-long USD/JPY with the ratio of traders short to long at 1.07 to 1. The number of traders net-long is 8.5% lower than yesterday and 7.7% lower from last week, while the number of traders net-short is 4.9% lower than yesterday and 3.0% higher from last week.For more information on retail sentiment, check out the new gauge developed by DailyFX based on trader positioning.

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