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Japanese Yen Talking Points

USD/JPY climbs to a fresh monthly-high (112.80) ahead of the semi-annual Humphrey-Hawkins testimony, with the dollar-yen exchange now at risk of making a run at the 2018-high (113.39) as it extends the series of higher highs & lows from earlier this week.

Image of daily change for major currencies

USD/JPY Overbought Signal Persists Ahead of Fed Chairman Testimony

Image of daily change for USDJPY

Despite the growing threat of a trade war, recent comments from Chairman Powell suggest the Federal Open Market Committee (FOMC) will stay on course to further normalize monetary policy as the U.S. economy is in a ‘good place.’

In turn, Chairman Powell may continue to strike a upbeat tone in front of U.S. lawmakers as the central bank head pledges to ‘work in a strictly nonpolitical way, based on detailed analysis,’ and a batch of hawkish comments is likely to boost the appeal of the greenback as the Fed appears to be on track to implement four rate-hikes in 2018.

Image of IG Client Sentiment for USDJPY

Keep in mind, the IG Client Sentiment report shows the retail crowd has remained net-short since June 28 when USD/JPY traded near the 110.50area even though price has moved 1.9% higher since then.

It looks as though the swing in retail positioning will continue as the number of traders net-long is 5.2% lower than yesterday and 20.3% lower from last week, while the number of traders net-short is 5.0% higher than yesterday and 17.0% higher from the previous week. The recent shift in sentiment offers a contrarian view as retail traders appear to be going against the current trend and continue to boost their net-short exposure, with USD/JPY at risk of extending the recent rally as it continues to carve a series of higher highs & lows.

At the same time, recent developments in the Relative Strength Index (RSI) suggest the bullish momentum is gathering pace as the oscillator pushes deeper into overbought territory, and the dollar-yen exchange rate is likely to stay bid as long as the indicator holds above 70.

USD/JPY Daily Chart

Image of USDJPY daily chart
  • Topside targets remain on the radar for USD/JPY as the pair continues to carve a bullish sequence, but need a close above the 112.40 (61.8% retracement) to 112.80 (38.2% expansion) region to open up the next region of interest coming in around 113.80 (23.6% expansion) to 114.30 (23.6% retracement).
  • Failed attempts to close above the stated region may generate a pullback, with the first downside area of interest coming in around 111.10 (61.8% expansion) to 111.60 (38.2% retracement), and the pair may ultimately stage a larger correction once the RSI flashes a textbook sell-signal and slips below 70.

For more in-depth analysis, check out the Q3 Forecast for the Japanese Yen

Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.