US Dollar, Japanese Yen (USD/JPY) Outlook:
- USD/JPY dips lower as rate expectations take a more dovish tone.
- US Dollar struggles to gain traction while yields remain strained.
- JPY holds of to safe-haven appeal but remains vulnerable to the Fed’s narrative.
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USD/JPY continues lower on banking jitters and lower rate expectations
The safe-haven appeal of the Japanese Yen has recently bolstered demand for the currency, forcing USD/JPY lower. After the collapse of SVB (Silicon Valley Bank), fears of contagion and a potential banking crisis in the United States spread through markets.
Related articles: Japanese Yen Forecast: SVB Fallout Uncertainty to Weigh on USD/JPY
As US authorities rushed in to assure clients that all deposits would be guaranteed by the Fed and the US Treasury, the probability of a 50-basis point rate hike faltered. With the FOMC meeting scheduled for next week, markets are now expecting the Federal Reserve to increase interest rates by 25bps (0.25%).
Source: FedWatch Tool
The shift in narrative and mounting concerns of financial instability in the US, pushed USD/JPY below prior support (now resistance) at the 200-day MA (moving average). A break of the rising wedge formation and below the 135.000 psychological level has allowed sellers to continue to drive the downtrend. This has forced the major currency to the 50-day MA, now holding as support at 132.400.
Although the repricing of the macro-environment has been the primary driver of action, a break of key technical levels could assist in guiding the next move.
USD/JPY Daily Chart
Chart prepared by Tammy Da Costa using TradingView
With the 23.6% Fibonacci retracement providing resistance at 133.05, a hold above this level opens the door for 135.00. However, if there is a more pessimism surrounding the fragility of the US banking system, a break below the 50-day MA may fuel a move toward the 130.00 mark.
USD/JPY Client Sentiment
USD/JPY:Retail trader data shows 46.65% of traders are net-long with the ratio of traders short to long at 1.14 to 1.We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/JPY prices may continue to rise.
Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current USD/JPY price trend may soon reverse lower despite the fact traders remain net-short.
--- Written by Tammy Da Costa, Analyst for DailyFX.com
Contact and follow Tammy on Twitter: @Tams707
