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Japanese Yen Talking Points

The recent decline in USD/JPY appears to have stalled ahead of the monthly-low (112.23) as attention turns to the Federal Reserve interest rate decision, but fresh developments in the Relative Strength Index (RSI) casts a bearish outlook for the exchange rate as the oscillator extends the bearish formation from October.

Image of daily change for major currencies

USD/JPY Retail Sentiment Shifts, RSI Snaps Bullish Trend Ahead of FOMC

Image of daily change for usdjpy rate

USD/JPY appears to be holding the monthly opening-range as the Federal Open Market Committee (FOMC) is widely expected to deliver at 25bp rate-hike, and a hawkish forward-guidance for monetary policy may keep the dollar-yen exchange rate afloat as the central bank appears to be on track to carry the hiking-cycle into 2019.

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Ongoing projections for a longer-run interest rate of 2.75% of 3.00% would imply that the FOMC remains committed in normalizing monetary policy despite the recent remarks from the Trump Administration, but a downward revision in the dot-plot would suggest the central bank is quickly approaching the end of its hiking-cycle as Fed officials show a greater willingness to tolerate above-target inflation over the policy horizon.

With that said, the fresh updates from Chairman Jerome Powell & Co. are likely to impact the near-term outlook for USD/JPY, but there appears to be a shift in retail sentiment as traders fade the recent weakness in the exchange rate.

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The IG Client Sentiment Report shows 55.9% of traders are now net-long USD/JPY compared to 44.1% in late-November, with the ratio of traders long to short at 1.27 to 1. In fact, the percentage of traders net-long is now its highest since October 16 when USD/JPY traded near 112.30. The number of traders net-long is 46.2% higher than yesterday and 34.7% higher from last week, while the number of traders net-short is 31.4% lower than yesterday and 23.0% lower from last week.

The drop in net-short position points to profit-taking behavior ahead of the Fed rate decision, but the sharp rise in net-long interest suggests retail traders are betting on the November range to hold over the days ahead, with the shift in the IG sentiment index offering a contrarian view to crowd sentiment especially as USD/JPY snaps the upward trend from earlier this year.

Moreover, the series of failed attempt totest the 2018-high (114.55) warns of a larger pullback, with the Relative Strength Index (RSI) starting to flash a bearish signal as it threatens trendline support. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

USD/JPY Daily Chart

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  • Keep in mind, the near-term outlook for USD/JPY remains capped by the 113.80 (23.6% expansion) to 114.30 (23.6% retracement) region, with the lack of momentum to test the 2018-high (114.55) raising the risk for a further decline in the exchange rate as it carves a series of lower highs & lows.
  • In turn, the 112.40 (61.8% retracement) to 113.00 (38.2% expansion) region sits on the radar, with a close below the stated region raising the risk for a move towards 111.10 (61.8% expansion) to 111.80 (23.6% expansion), which lines up with the October-low (111.38).

For more in-depth analysis, check out the Q4 Forecast for the Japanese Yen

Image of DailyFX economic calendar

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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.