USD/JPY Reverses Ahead of Monthly Low with Fed Rate Hike on Tap

Japanese Yen Talking Points

USD/JPY halts the series of lower highs and lows from last week to largely mirror the rebound in US Treasury yields, and the Federal Reserve interest rate decision may lead to a near-term advance in the exchange rate as it appears to be reversing ahead of the monthly low (134.70).

USD/JPY Reverses Ahead of Monthly Low with Fed Rate Hike on Tap

USD/JPY appears to be stuck in the monthly range as the Bank of Japan (BoJ) sticks to the Quantitative and Qualitative Easing (QQE) program with Yield Curve Control (YCC), but the exchange rate may continue to track the positive slope in the 50-Day SMA (133.68) as the Federal Open Market Committee (FOMC) is expected to deliver another 75bp rate hike.

The diverging paths between the Fed and BoJ should keep USD/JPY afloat as Chairman Jerome Powell and Co. show a greater willingness to implement a restrictive policy, and the exchange rate may stage another attempt to test the September 1998 high (139.91) as long as the FOMC stays on course to implement higher interest rates throughout the remainder of the year.

However, the threat of a recession may push the FOMC to winddown its hiking cycle as the central bank tries to achieve a soft-landing for the US economy, and a shift in the Fed’s forward guidance may produce a bearish reaction in the US Dollar if the central bank looks to hold the benchmark interest rate at neutral for the remainder of the year.

In turn, the outlook for Fed policy may ultimately influence USD/JPY as the BoJ remains reluctant to switch gears, but the tilt in retail sentiment looks poised to persist as traders have been net-short the pair for most of 2022.

The IG Client Sentiment report shows 32.87% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 2.04 to 1.

The number of traders net-long is 0.27% lower than yesterday and 17.20% higher from last week, while the number of traders net-short is 8.37% higher than yesterday and 13.03% lower from last week. The jump in net-long interest has helped to alleviate the crowding behavior as 28.86% of traders were net-long USD/JPY last week, while the decline in net-short position comes as the exchange rate halts the series of lower highs and lows from last week.

With that said, USD/JPY may stage a larger advance over the coming days as the FOMC is expected to deliver another 75bp rate hike, and the exchange rate may stage another attempt to test the September 1998 high (139.91) as it appears to be reversing course head of the monthly low (134.70).

USD/JPY Rate Daily Chart

Source: Trading View

• USD/JPY snaps the series of lower highs and lows from last week as it holds above the monthly low (134.70), and the exchange rate may continue to exhibit a bullish trend as the 50-Day SMA (133.68) reflects a positive slope.
• Lack of momentum to break/close below the 135.30 (50% expansion) area may push USD/JPY back above the 137.40 (61.8% expansion) to 137.80 (316.8% expansion) region, with a break above the monthly high (139.39) bringing the September 1998 high (139.91) back on the radar.
• However, failure to defend the monthly low (134.70) may lead to a test of the 50-Day SMA (133.68), with the next area of interest coming in around 132.20 (78.6% retracement) to 133.20 (38.2% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong