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US Dollar Forecast: Pullback in US Yields Hampers DXY Index, USD/JPY

US Dollar Forecast: Pullback in US Yields Hampers DXY Index, USD/JPY

Christopher Vecchio, CFA,
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US Dollar Outlook:

  • The US Dollar (via the DXY Index) has begun to carve out a range after reaching a fresh yearly high last week.
  • A drop in US Treasury yields have helped USD/JPY rates pullback after hitting their highest level since October 1998.
  • The IG Client Sentiment Index suggests that USD/JPY has a mixed bias in the near-term.
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Fed Hike Odds, US Treasury Yields Drop

The US Dollar (via the DXY Index) has been trading sideways over the past week after setting a fresh yearly high, and hitting its highest level since December 2002. The pullback has coincided with a drop in Fed rate hike odds and US Treasury yields in recent days, not a surprise considering these factors have been instrumental to the greenback’s meteoric ascent in 2022.

In particular, the drop in Fed rate hikes and US Treasury yields is being felt most directly by USD/JPY rates, which have eased back after reaching their highest level since October 1998. But the divergence between the Federal Reserve and the Bank of Japan remains stark and will likely grow further in the coming months, the near-term reversal in USD/JPY rates may soon be setting up a ‘buy the dip’ opportunity.

DXY PRICE INDEX TECHNICAL ANALYSIS: DailyTimeframe (June 2021 to June 2022) (CHART 1)

The DXY Index has been trading sideways for the past few days, within the high/low range (103.42/105.79) carved out last week around the June Fed rate decision. Bullish momentum has stalled, with the dollar gauge holding at its daily 5-, 8-, 13-, and 21-EMA envelope, which is in remains in bullish sequential order. Daily MACD may soon issue a sell signal while above its signal line, while daily Slow Stochastics have dropped out of overbought territory. A clearer directional bias will emerge either above 105.79 or below 103.42.

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Just yesterday, USD/JPY rates reached their highest level since October 1998, so the two days of losses are not necessarily consequential in the grand scheme of things. But if Fed rate hike odds continue to drop alongside US Treasury yields, the pair may come under greater pressure before trading higher anew. The rising trendline from the May 30 and June 16 lows coincides neatly with the daily 21-EMA (one-month moving average) and should be considered the key inflection point if the uptrend over the past three weeks is to be maintained at its current pace. As noted in early-June, “a ‘buy the dip’ mentality is appropriate in the near-term.”

IG Client Sentiment Index: USD/JPY RATE Forecast (June 23, 2022) (Chart 3)

USD/JPY: Retail trader data shows 24.12% of traders are net-long with the ratio of traders short to long at 3.15 to 1. The number of traders net-long is 8.67% lower than yesterday and 8.18% higher from last week, while the number of traders net-short is 7.89% lower than yesterday and 1.63% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/JPY prices may continue to rise.

Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed USD/JPY trading bias.

--- Written by Christopher Vecchio, CFA, Senior Strategist

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