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USD/JPY Reverses Ahead of Monthly Low with US Inflation Report on Tap

USD/JPY Reverses Ahead of Monthly Low with US Inflation Report on Tap

David Song, Strategist

Japanese Yen Talking Points

USD/JPY bounces back from a fresh weekly low (114.41) despite the slump in global equity prices, and fresh data prints coming out of the US economy may generate a larger rebound in the exchange rate as the Federal Reserve’s preferred gauge for inflation is expected to increase for the fifth consecutive month.

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USD/JPY Reverses Ahead of Monthly Low with US Inflation Report on Tap

USD/JPY appears to have reversed ahead of the monthly low (114.15) to largely track the recent rebound in longer-dated US Treasury yields, and the exchange rate may stage another attempt to clear the opening range for 2022 as the Greenback appreciates against all of its major counterparts.

Image of DailyFX Economic Calendar for US

At the same time, the update to the US Personal Consumption Expenditure (PCE) Price Index may generate a bullish reaction in the Dollar as the Fed’s preferred gauge for inflation is anticipated to increase to 5.1% from 4.9% per annum in December, which would mark the highest reading since 1983.

Another uptick in the core PCE index may force the Federal Open Market Committee (FOMC) to adjust the forward guidance as “most participants noted that, if inflation does not move down as they expect, it would be appropriate for the Committee to remove policy accommodation at a faster pace than they currently anticipate,” and it remains to be seen if Chairman Jerome Powell and Co. will unveil a more detailed exit strategy at the next interest rate decision on March 16 as the central bank is slated to release the updated Summary of Economic Projections (SEP).

Until then, a further deterioration in risk appetite may keep USD/JPY afloat as Russia-Ukraine tensions appear to be spurring a flight to safety, and the diverging paths between the FOMC and Bank of Japan (BoJ)may continue to coincide with the crowding behavior seen in late-2021 as the recent flip in retail sentiment was short lived.

Image of IG Client Sentiment for USD/JPY rate

The IG Client Sentiment report shows 35.95% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 1.78 to 1.

The number of traders net-long is 13.99% lower than yesterday and 6.84% lower from last week, while the number of traders net-short is 8.74% lower than yesterday and 7.52% lower from last week. The decline in net-long position comes as USD/JPY snaps back from a fresh weekly low (114.41), while the decline in net-short interest has done little to alleviate the crowding behavior as 36.69% of traders were net-long the pair last week.

With that said, USD/JPY may stage another attempt to break out of the opening range for 2022 as it reverses ahead of the monthly low, and the update to the US PCE Price Index may push the exchange rate to fresh yearly highs as evidence of persistent inflation puts pressure on the FOMC to adjust its exit strategy.

USD/JPY Rate Daily Chart

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Source: Trading View

  • The broader outlook for USD/JPY remains constructive as the 200-Day SMA (112.21) preserves the positive slope from last year, with the recent rally in the exchange rate negating the threat for a head-and-shoulders formation as it tracks the opening range for 2022.
  • USD/JPY appears to be stuck in a defined range amid the lack of momentum to clear the January high (116.35), but the exchange rate may stage further attempts to break out of the opening range for 2022 as it reverses ahead of the monthly low (114.15).
  • Failure to test the Fibonacci overlap around 113.80 (23.6% expansion) to 114.30 (23.6% retracement) has pushed USD/JPY back towards the 115.90 (100% expansion) to 116.10 (78.6% expansion) region, with a break above the January high (113.35) bringing the 117.60 (23.6% retracement) to 117.90 (23.6% retracement) area on the radar.

--- 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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