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Japanese Yen Talking Points

The USD/JPY rebound following the currency market flash-crash appears to have stalled, with the updates to the U.S. Consumer Price Index (CPI) spurring a limited reaction, and the exchange rate may continue to consolidate over the coming days as it snaps the series of higher highs & lows from earlier this week.

Image of daily change for major currencies

USD/JPY Flash-Crash Rebound Stalls, U.S. CPI Fails to Impress

Image of daily change for usdjpy

USD/JPY trades in a narrow range as the U.S. CPI slows to 1.9% from 2.2% per annum in November, and signs of a less robust economy keeps the greenback susceptible to near-term headwinds as the uncertainty surrounding fiscal policy rattles the outlook for growth and inflation.

Image of fed fund futures

In response, the Federal Open Market Committee (FOMC) may continue to soften its hawkish tone at the next interest rate decision on January 30 as officials see ‘growth moderating ahead,’ and a growing number of policymakers may endorse a wait-and-see approach for 2019 as ‘changes in financial conditions appeared to reflect greater concerns about the global economic outlook. Subdued bet for higher U.S. interest rates may continue to drag on USD/JPY as Fed Fund Futures show the FOMC on hold for most of 2019, but the flash crash appears to be shaking up retail interest as traders fade the sharp rebound in the exchange rate.

Image of IG client sentiment for usdjpy

The IG Client Sentiment Report shows 56.9%of traders are now net-long USD/JPY compared to 60.2% earlier this week, with the ratio of traders long to short at 1.32 to 1. The number of traders net-long is 2.0% lower than yesterday and 0.5% higher from last week, while the number of traders net-short is 5.1% lower than yesterday and 36.7% higher from last week.

The ongoing tilt in retail sentiment provides a contrarian view to crowd sentiment as net-long interest remains little changed following the USD/JPY flash crash, but the sharp accumulation in net-short position may foreshadow a more material shift in market behavior as traders fade the recent recovery in USD/JPY. With that said, the broader outlook remains tilted to the downside as both price and the Relative Strength Index (RSI) snap the bullish trends from the previous year, but recent developments in the momentum indicator warn of a larger correction as the oscillator bounces back from oversold territory. 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
  • Broader outlook for USD/JPY remains tilted to the downside as both price and the RSI snap the bullish trends from 2018, but the failed attempt to test the 2018-low (104.63) may generate range-bound conditions as the oscillator climbs back above 30.
  • In turn, the Fibonacci overlap around 109.40 (50% retracement) to 110.00 (78.6% expansion) sits on the radar, but the lack of momentum to hold above the 108.30 (61.8% retracement) to 108.40 (100% expansion) region raises the risk for a move back towards 106.70 (38.2% retracement) to 107.20 (61.8% retracement), with the next area of interest coming in around 105.40 (50% retracement).

For more in-depth analysis, check out the Q1 2019 Forecast for the Japanese Yen

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Want to know what other currency pairs the DailyFX team is watching? Download and review the Top Trading Opportunities for 2019.

--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.