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USD/JPY Bull Trend Vulnerable to Swings in Risk Sentiment

USD/JPY Bull Trend Vulnerable to Swings in Risk Sentiment

David Song, Strategist

Japanese Yen Talking Points

USD/JPY bounces back from a fresh weekly-low (111.82), with benchmark equity indices reflecting a similar dynamic, but the exchange rate may continue to threaten the upward trend from earlier this year as it extends the series of lower highs from earlier this week.

Image of daily change for major currencies

USD/JPY Bull Trend Vulnerable to Swing in Risk Sentiment

Image of daily change for usdjpy rate

It seems as though swing in risk appetite will continue to sway USD/JPY ahead of the next Federal Open Market Committee (FOMC) meeting in November as the central bank is widely expected to retain the current policy, and the recent pickup in risk appetite may prove to be short lived as dual threats of rising tariffs, rates add to the global wall of worry.

Image of fed fund futures

Keep in mind, the FOMC’s hiking-cycle instills a long-term bullish outlook for USD/JPY as Chairman Jerome Powell & Co. appear to be on track to deliver another 25bp rate-hike in December, and the central bank may continue to endorse a hawkish forward-guidance going into 2019 as a growing number of Fed officials see a risk for above-neutral interest rates.

Until then, USD/JPY remains susceptible to a larger correction as there appears to be a material change in market behavior, and a pickup in volatility may continue to impact retail interest as traders appear to be positioning for a near-term advance in the exchange rate.

Image of IG client sentiment for usdjpy

The IG Client Sentiment Reportshows 53.2% of traders are net-long with the ratio of traders long to short at 1.14 to 1. Even though the number of traders net-long is 2.4% lower than yesterday and 8.6% lower from last week, with the number of traders net-short 4.9% higher than yesterday and 1.6% higher from last week, traders flipped net-long on October 15 when the exchange rate traded near 112.15.

With that said, the shift in client sentiment offers a contrarian view to crowd sentiment as traders appear to be betting on a larger advance off of the monthly-low (111.63), but USD/JPY may make continue to threaten the upward trend from earlier this year if the change in retail interest persists. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

USD/JPY Daily Chart

Image of usdjpy daily chart
  • Near-term outlook for USD/JPY remains capped by the failed attempts to break/close above the 112.40 (61.8% retracement) to 113.00 (38.2% expansion) region, with the exchange rate at risk for range-bound prices as the 111.10 (61.8% expansion) to 111.80 (23.6% expansion) hurdle offers support.
  • However, USD/JPY may continue to threaten the upward trend from earlier this year, with a break/close below the short-term support zone raising the risk for a move back towards 109.40 (50% retracement) to 110.00 (78.6% expansion).

For more in-depth analysis, check out the Q4 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!

Additional Trading Resources

Are you looking to improve your trading approach? Review the ‘Traits of a Successful Trader’ series on how to effectively use leverage along with other best practices that any trader can follow.

Want to know what other currency pairs the DailyFX team is watching? Download and review the Top Trading Opportunities for 2018.

--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.