Japanese Yen Talking Points

USD/JPY appears to be stuck in a narrow range as it struggles to push back above the 50-Day SMA (110.16), and the exchange rate may continue to consolidate ahead of the Kansas City Fed Economic Symposium scheduled for August 26 – 28 amid the ongoing weakness in longer-dated US Treasury yields.


USD/JPY Rate Struggles to Clear 50-Day SMA Ahead of Fed Symposium

USD/JPY largely mimic the behavior in US yields as it tracks the monthly range, but the Fed symposium may shake up foreign exchange markets a growing number of central bank officials show a greater willingness to scale back monetary support.

Chairman Jerome Powell and Co. may utilize the event at Jackson Hole, Wyoming to highlight an imminent shift in monetary policy as most Fed officials “judged that the standard set out in the Committee’s guidance regarding asset purchases could be reached this year,” with a few participants noting that “monetary policy had limited ability to address the labor supply shortages and hiring difficulties currently constraining the level of employment.

The minutes from the July meeting suggest the Federal Open Market Committee (FOMC) is on track to adjust the forward guidance as “some participants suggested that it would be prudent for the Committee to prepare for starting to reduce its pace of asset purchases relatively soon,” and a batch of hawkish rhetoric may spark a bullish reaction in the US Dollar as it fuels speculation of seeing a potential exit strategy at the next Fed interest rate decision on September 22.

At the same time, more of the same from Chairman Powell and Co. may drag on USD/JPY as the FOMC braces for a transitory rise in inflation, but a further appreciation in the exchange rate may lead to a shift in retail sentiment like the behavior seen earlier this year.

Image of IG Client Sentiment for USD/JPY rate

The IG Client Sentiment report shows 52.01% of traders are currently net-long USD/JPY, with the ratio of traders long to short standing at 1.08 to 1.

The number of traders net-long is 4.72% lower than yesterday and 14.78% lower from last week, while the number of traders net-short is 1.71% lower than yesterday and 1.86% lower from last week. The decline in net-long position has alleviated the tilt in retail sentiment as 63.74% of traders were net-long USD/JPY last week, while the drop in net-short position comes as the exchange rate makes further attempts to push back above the 50-Day SMA (110.16).

With that said, swings in retail sentiment may persist as USD/JPY continues to trade within the monthly range, and the exchange rate may track sideways ahead of the Fed symposium amid the ongoing weakness in US Treasury yields.

USD/JPY Rate Daily Chart

Image of USD/JPY rate daily chart

Source: Trading View

  • Keep in mind, USD/JPY negated the threat of a head-and-shoulders formation as it pushed to a fresh yearly high (111.66) in July, with the Relative Strength Index (RSI) offering a similar development as it established an upward trend during the same period.
  • However, the RSI has snapped the bullish formation as USD/JPY struggled to hold above the 50-Day SMA (110.16), with the exchange rate stuck in a narrow range following the failed attempts to push back above the moving average.
  • Lack of momentum to hold above the 109.40 (50% retracement) to 110.00 (78.6% expansion) region may push USD/JPY back towards the Fibonacci overlap around 108.00 (23.6% expansion) to 108.40 (100% expansion), with a move below the 200-Day SMA (107.55) opening up the 107.20 (61.8% retracement) region.
  • Need a close above the 50-Day SMA (110.16) to bring the topside targets back on the radar, with a break above the monthly high (110.80) opening up the overlap around 111.10 (61.8% expansion) to 111.60 (38.2% retracement).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong


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