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USD/JPY Rally to Persist as Long as RSI Holds in Overbought Territory

USD/JPY Rally to Persist as Long as RSI Holds in Overbought Territory

David Song, Strategist

Japanese Yen Talking Points

USD/JPY trades at its highest level since 2002 as it largely tracks the rise in US Treasury yields, and the bullish momentum underlying the exchange is likely to persist as long as the Relative Strength Index (RSI) holds in overbought territory.

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USD/JPY Rally to Persist as Long as RSI Holds in Overbought Territory

USD/JPY cleared the May 2002 high (129.09) earlier this week as the Bank of Japan (BoJ) showed little intentions of moving away from its easing cycle, and the diverging paths for monetary policy may keep the exchange rate afloat with the Federal Reserve on track to deliver a series of rate hikes over the coming months.

Image of CME FedWatch Tool

Source: CME

In fact, the CME FedWatch Tool reflects a greater than 90% probability for a 50bp rate hike at the next Federal Open Market Committee (FOMC) meeting amid the ongoing rise in the US Consumer Price Index (CPI), and it remains to be seen if the central bank will adjust its exit strategy as the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.

As a result, the US Dollar may continue to outperform its Japanese counterpart in 2022 as Chairman Jerome Powell insists that a 50bp rate hike “will be on the table for the May meeting, and the exchange rate may attempt to test the April 2002 high (133.82) ahead of the FOMC rate decision on May 4 as the central bank shows a greater willingness to normalize monetary policy at a faster pace.

In turn, the overbought reading in the RSI may continue to accompany a further appreciation in USD/JPY like the price action seen during the previous month, while the tilt in retail sentiment looks poised to persist as traders have been net-short the pair since late January.

Image of IG Client Sentiment for USD/JPY rate

The IG Client Sentiment report shows 30.09% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 2.32 to 1.

The number of traders net-long is 20.21% higher than yesterday and 29.23% higher from last week, while the number of traders net-short is 2.19% lower than yesterday and 1.89% higher from last week. The jump in retail long interest has helped to alleviate the crowding behavior as 28.91% of traders were net-long USD/JPY during the first full week of April, while the rise in net-short position comes as the exchange rate struggles to extend the series of higher highs and lows from earlier this week.

With that said, recent price action raises the scope for a near-term pullback in USD/JPY as it halts a five-day advance, but the diverging paths between the FOMC and BoJ may push USD/JPY toward the April 2002 high (133.82) as the bullish momentum looks poised to persist.

USD/JPY Rate Daily Chart

Image of USD/JPY rate daily chart

Source: Trading View

  • USD/JPY cleared the May 2002 high (129.09) as it climbed to a fresh yearly high (129.41), and the exchange rate may attempt to test the April 2022 high (133.82) as long as the Relative Strength Index (RSI) holds in overbought territory.
  • USD/JPY may stage further attempts to break/close above the Fibonacci overlap around 129.40 (261.8% expansion) to 130.20 (100% expansion) as both the 50-Day SMA (119.87) and 200-Day SMA (114.40) reflect a positive slope, with a break above the April 2022 high (133.82) opening up the 135.20 (100% expansion) region.
  • However, lack of momentum to break/close above the overlap around 129.40 (261.8% expansion) to 130.20 (100% expansion) may generate a near-term pullback in USD/JPY as it snaps the series of higher highs and lows from earlier this week, with a move below 70 in the RSI likely to be accompanied by a larger correction in the exchange rate as the bullish momentum abates.
  • Failure to hold above the 126.20 (78.6% expansion) region may push USD/JPY back towards the 2015 high (125.86), with the next area of interest coming in around 122.40 (78.6% retracement) to 123.10 (61.8% expansion).

--- 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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