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USD/JPY Forecast: RSI Clings to Bearish Trend, US Yields Remains Subdued

USD/JPY Forecast: RSI Clings to Bearish Trend, US Yields Remains Subdued

David Song,
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Japanese Yen Talking Points

USD/JPY tags a fresh monthly-high (110.00) following the Bank of Japan (BoJ) meeting as Governor Haruhiko Kuroda & Co. stick to the easing-cycle, but waning expectations for a Federal Reserve rate-hike may curb the flash-crash rebound, with the exchange rate at risk of exhibiting a bearish behavior as long the Relative Strength Index (RSI) preserves the downward trend from late-2018.

Image of daily change for major currencies

USD/JPY Forecast: RSI Clings to Bearish Trend, US Yields Remains Subdued

Image of daily change for usdjpy rate

It seems as though the BoJ has no interest in moving away from the Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control as the central bank lowers its inflation forecast for 2019 & 2020, and the recent pickup in risk appetite may keep USD/JPY afloat as global equity prices pare the decline from December.

Image of Fed Fund Futures

Shifts in market sentiment may continue to influence USD/JPY as the Federal Open Market Committee (FOMC) is widely expected to retain the current policy on January 30, and the interest rate decision may do little to boost the appeal of the dollar as Chairman Jerome Powell & Co. scale back the hawkish forward-guidance for monetary policy. In turn, Fed Fund Futures may continue to show the central bank on hold throughout the first-half of 2019, and subdued U.S. Treasury Yields may drag on USD/JPY as the central bank comes under pressure to conclude its hiking-cycle ahead of schedule.

It remains to be seen if the FOMC will alter the $50B/month in quantitative tightening (QT) asChairman Jerome Powell sees the balance sheet to returning to a ‘more normal level,’ but the currency market flash crash appears to have shaken up retail interest as traders remained positioned for a larger rebound.

Image of IG Client Sentiment for usdjpy

The IG Client Sentiment Report shows 54.2% of traders are still net-long USD/JPY compared to 58.6% last week, with the ratio of traders long to short at 1.18 to 1. Despite the flash-crash, traders have been net-long since December 18 when USD/JPY traded near 112.50 even though price has moved 3.4% lower since then.The number of traders net-long is 3.2% lower than yesterday and 13.0% lower from last week, while the number of traders net-short is 0.3% lower than yesterday and 11.8% higher from last week.

Keep in mind, the ongoing tilt in retail sentiment provides a contrarian view to crowd sentiment as traders remain net-long, but a further pickup in net-short interest may foreshadow a broader shift in retail sentiment as the IG Client Sentiment index continues to pullback from an extreme reading. With that said, the broader outlook for USD/JPY remains tilted to the downside as both price and the Relative Strength Index (RSI) snap the bullish trends from the previous year, and recent developments in the momentum indicator warns of a further depreciation in the dollar-yen exchange rate as the oscillator continues to track the bearish formation from October. 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
  • The advance from the 2018-low (104.63) appears to be losing steam as USD/JPY struggles to break/close above the 109.40 (50% retracement) to 110.00 (78.6% expansion) region, while the RSI seems to be responding to trendline resistance.
  • In turn, the 108.30 (61.8% retracement) to 108.40 (100% expansion) area is now back on the radar, with a break/close below the stated region raising the risk for a move back towards 106.70 (38.2% retracement) to 107.20 (61.8% retracement).

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

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--- 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.