US Dollar Outlook:

• The US Dollar’s post-FOMC rally has continued has US Treasury yields and Fed rate hike odds rise.
• USD/JPY rates have been unable to make a decisive break lower as markets shrug off the Japanese Ministry of Finance’s intervention efforts.
• The IG Client Sentiment Index suggests that USD/JPY rates have a mixed bias in the near-term.

US Dollar Wrecking Ball Resumes

The US Dollar (via the DXY Index) may have slipped when the FOMC released their policy statement yesterday, but ever since Fed Chair Jerome Powell’s press conference, the bull run has reemerged. Fed Chair Powell dismissed any notion of a pivot in the near-future when he suggested that “the ultimate level of interest rates will be higher than previously expected.”

In other words, the Fed’s main rate will be higher than what was indicated at the September Fed meeting, when the Summary of Economic Projections suggested a terminal rate of 4.6% by the end of 2023.

Accordingly, Fed rate hike odds have shot higher over the past 24-hours, with the Fed’s main rate expected to peak near 5.135% by June 2023; a 50-bps rate hike is discounted for December 2022, followed by 25-bps rate hikes in February 2023, March 2023, and either May or June 2023.

Rejuvenated Fed rate hike odds have pushed US Treasury yields higher across the curve, with short-end yields rising faster than their long-end counterparts, leading the 2s10s spread to its deepest inversion (-57-bps) since September 1981. As has been the case for all of 2022, the inverting US yield curve has been good news for the US Dollar and bad news for US stocks, gold prices, and cryptocurrencies.

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

The DXY Index appears to be consolidating in a bull flag since the middle of September, which in context of the preceding uptrend, suggests that the next directional move will be a breakout higher. Momentum has rapidly started to improve, with the greenback gauge above its daily 5-, 8-, 13-, and 21-EMA envelope, which is back in bullish sequential order as of today. Daily MACD has issued a bullish crossover while above its signal line, and daily Slow Stochastics are advancing towards overbought territory. A move above the October 21 bearish outside engulfing bar high at 113.94 would suggest a bullish breakout has commenced.

USD/JPY RATE TECHNICAL ANALYSIS: DAILY TIMEFRAME (November 2021 to November 2022) (CHART 2)

USD/JPY rates have been weighed down by the Japanese Ministry of Finance’s intervention efforts in recent weeks, but a decisive break lower has not transpired. Instead, traders are treating the September 22 high of 145.90 as support, with a range having formed between there and the 151.94 high set on October 21. The technical structure remains bullish, as the pair remains above its daily EMA envelope, which is still in bullish sequential order. Daily MACD’s descent while above its signal line is slowing, and daily Slow Stochastics are rebounding towards their median line. Accordingly, it remains the case, that as long as the policy gap between the Bank of Japan and Federal Reserve remains, it will be difficult for USD/JPY rates to pullback meaningful.

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

USD/JPY: Retail trader data shows 32.98% of traders are net-long with the ratio of traders short to long at 2.03 to 1. The number of traders net-long is 5.70% lower than yesterday and 27.16% higher from last week, while the number of traders net-short is 0.67% higher than yesterday and 3.52% lower 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