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USD/JPY Recovery to Persist as Bullish Price Series Remains Intact

USD/JPY Recovery to Persist as Bullish Price Series Remains Intact

David Song, Strategist

Japanese Yen Talking Points

USD/JPY struggles to retain the advance following the Bank of Japan (BoJ) interest rate decision even as the 10-Year US Treasury yield climbs to a fresh yearly high (1.86%), but the exchange rate may stage a larger rebound over the coming days if it manages to retain the series of higher highs and lows from the monthly low (113.48).

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USD/JPY Recovery to Persist as Bullish Price Series Remains Intact

USD/JPY appears to be under pressure amid the recent weakness in global equity prices, and it seems as though the exchange rate will move to the beat of its own drum ahead of the Federal Reserve interest rate decision on January 26 as it bucks the recent strength in the US Dollar.

As a result, a further shift in risk appetite may continue to drag on USD/JPY as the Omicron variant continues to pose a threat to the global economy, but the diverging paths between the BoJ and Federal Open Markets Committee (FOMC) casts a bullish outlook for the exchange rate as the CME FedWatch Tool reflects a greater than 80% probability for a 25bp rate hike in March.

In turn, speculation for a looming change in Fed policy may keep the recent series of higher highs and lows intact as USD/JPY trades back above the 50-Day SMA (114.30), and the exchange rate may continue to retrace the decline from earlier this month as longer-dated US Treasury yields push to fresh yearly highs.

However, failure to defend the bullish price series may push USD/JPY to fresh monthly lows as it failed to defend the opening range for January, and a further decline in the exchange rate may generate a flip in retail sentiment like the behavior seen during the previous year.

Image of IG Client Sentiment for USD/JPY rate

The IG Client Sentiment report shows 40.20% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 1.49 to 1.

The number of traders net-long is 11.63% lower than yesterday and 21.29% higher from last week, while the number of traders net-short is 5.68% higher than yesterday and 20.59% lower from last week. The rise in net-long interest has helped to alleviate the tilt in retail sentiment as only 31.29% of traders were net-long USD/JPY last week, while the decline in net-short interest comes as the exchange rate retains the series of higher highs and lows from the December low (113.48).

With that said, USD/JPY may move to the beat of its own drum ahead of the FOMC rate decision as there seems to be a shift in risk appetite, but the exchange rate may stage a larger rebound over the coming days if it manages to retain the series of higher highs and lows from the monthly low (113.48).

USD/JPY Rate Daily Chart

Image of USD/JPY rate daily chart

Source: Trading View

  • The broader outlook for USD/JPY remains constructive as it cleared the November high (115.52) at the start of 2022, with the 200-Day SMA (111.37) indicating a similar dynamic as it retains the positive slope from last year.
  • The Relative Strength Index (RSI) showed a similar dynamic as it pushed into overbought territory earlier this month, but a textbook sell signal has materialized as the oscillator falls back from overbought territory to push below 70.
  • As a result, the decline from the monthly high (116.35) may turn out to be a correction in the broader trend, with the failed attempt to closes below the Fibonacci overlap around 113.80 (23.6% expansion) to 114.30 (23.6% retracement) pushing the exchange rate back above the 50-Day SMA (114.30) as it carves a series of higher highs and lows.
  • In turn, the bullish price series may push USD/JPY back towards the 115.90 (100% expansion) to 116.10 (78.6% expansion) region, with a break above the January high (116.35) opening up the 117.60 (23.6% retracement) to 117.90 (23.6% retracement) area.

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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

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