USD/JPY Rate Outlook Mired by Shift in Retail FX Sentiment

Japanese Yen Talking Points

USD/JPY initiates a fresh series of lower highs & lows after failing to test the monthly-high (112.14), and the exchange rate may continue to consolidate ahead of the Federal Open Market Committee (FOMC) interest rate decision as the Relative Strength Index (RSI) continues to threaten the bullish formation from earlier this year.

USD/JPY Rate Outlook Mired by Shift in Retail FX Sentiment

USD/JPY remains under pressure even though U.S. President Donald Trump tweets that ‘the economy is doing great,’ and the recent weakness in the U.S. dollar may persist over the remainder of the week as the Federal Reserve is widely expected to keep the benchmark interest rate in its current threshold of 2.25% to 2.50%.

The FOMC rate decision itself may generate little interest as the central bank appears to have abandoned the hiking-cycle, and the updates to the Summary of Economic Projections (SEP) may have a greater impact in shaping the near-term outlook for the U.S. dollar as Fed officials warn ‘that some risks to the downside had increased, including the possibilities of a sharper-than-expected slowdown in global economic growth, particularly in China and Europe.’

In response, Fed officials may adjust the longer-run interest rate forecast as the previous projections stood at 2.75% to 3.00%, and Chairman Jerome Powell & Co. may also show a greater willingness to taper the $50B/month in quantitative tightening (QT) in an effort to mitigate the downside risks surrounding the U.S. economy. As a result, a dovish forward-guidance for monetary policy is likely to produce headwinds for the dollar, but the recent shift in market participation may persist even after the FOMC meeting as retail sentiment recovers from an extreme reading.

The IG Client Sentiment Report shows 50.6% of traders are now net-long USD/JPY, with the ratio of traders long to short at 1.02 to 1.The number of traders net-long is 6.6% higher than yesterday and 3.7% higher from last week, while the number of traders net-short is 0.1% lower than yesterday and 9.4% lower from last week.

Keep in mind, traders were net-short since February 27, with the ratio slipping to an extreme reading earlier this month, but the IG Client Sentiment index has recovered since then amid a pickup in net-long interest. The flip in the sentiment index warns of a broader shift in USD/JPY behavior, with recent price action raising the risk for a further decline in the exchange rate as it initiates a fresh series of lower highs & lows, while the Relative Strength Index (RSI) continues to threaten the bullish formation from earlier this year. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

USD/JPY Daily Chart

• Keep in mind, the near-term outlook for USD/JPY remains constructive as both price and the RSI continue to track the upward trends from earlier this year, but the correction following the currency market flash-crash appears to be sputtering amid the lack of momentum to test the Fibonacci overlap around 112.40 (61.8% retracement) to 113.00 (38.2% expansion).
• In turn, failure to hold above the 111.10 (61.8% expansion) to 111.80 (23.6% expansion) region raises the risk for a move back towards 109.40 (50% retracement) to 110.00 (78.6% expansion), which largely lines up with the 50-Day SMA (110.15).
• Next downside region of interest comes in around 108.30 (61.8% retracement) to 108.40 (100% expansion), but failure to extend the series of lower highs & lows from the previous week may generate range-bound conditions over the coming days.

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.