US Dollar Outlook:

  • Another hot US inflation report has led to a great deal of volatility in USD-pairs.
  • USD/JPY rates turned lower after briefly hurdling their 1998 high, while the DXY Index appears to be funneling into a symmetrical triangle.
  • The IG Client Sentiment Index suggests that USD/JPY rates have a bullish bias in the near-term.

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Post-CPI Reversal

The September US inflation report (CPI) initially sparked a stronger US Dollar as Fed rate hike odds for both the November and December FOMC meetings jumped. But amid what appears to be a meaningful short covering rally in US equity markets, cross-asset flows dragged down the greenback, erasing its post-CPI gains. Curiously, US Treasury yields have stayed elevated on the session, giving credence to the idea that there hasn’t been a significant sea change just yet. In turn, weakness seen in the broader DXY Index, and USD/JPY rates in particular, may be short-lived.

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

A bearish key reversal may be forming on the daily timeframe, suggesting that the DXY Index may be setting a near-term top. In context of price action over the past few weeks, this could mean that the DXY Index is funneling into a symmetrical triangle, which given the preceding uptrend, would ultimately suggest a continuation effort higher. Triangle support comes in closer to 111.25 over the coming sessions, which could see a brief break of the daily 21-EMA (one-month moving average), which happened during the first week of October. A break above today’s high of 113.92 would suggest a bullish breakout is beginning.

Recommended by Christopher Vecchio, CFA

How to Trade USD/JPY

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

USD/JPY rates reached the 100% Fibonacci retracement of the 1998 high/2011 low range after the September US inflation report, briefly pushing to their highest level since August 1990. Although most of the gains have been reversed, USD/JPY rates remain positive on the session. The technical structure remains bullish as a result.USD/JPY rates are above their daily EMA envelope, which remains in bullish sequential order. Daily MACD is rising again while above its signal line, and daily Slow Stochastics are holding in overbought territory.

It’s worth noting that USD/JPY rates have traded above levels at which the Japanese Ministry of Finance has previously intervened to support the Japanese Yen. It remains the case, however, 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 (October 13, 2022) (Chart 3)

USD/JPY: Retail trader data shows 18.05% of traders are net-long with the ratio of traders short to long at 4.54 to 1. The number of traders net-long is 26.15% lower than yesterday and 10.38% lower from last week, while the number of traders net-short is 1.72% lower than yesterday and 5.43% 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.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/JPY-bullish contrarian trading bias.

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— Written by Christopher Vecchio, CFA, Senior Strategist





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