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USD/JPY Reverses Ahead of 2021 High with US PCE Price Index on Tap

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Japanese Yen Talking Points

USD/JPY gives back the advance following the Federal Reserve interest rate decision as the 10-Year US Treasury yield slips to a fresh monthly low (1.35%), and the exchange rate appears to have reversed course ahead of the 2021 high (110.97) as it carves a series of lower highs and lows from the June high (110.82).

USD/JPY Reverses Ahead of 2021 High with US PCE Price Index on Tap

The recent rally in USD/JPY may continue to unravel as longer-dated US yields come under pressure, but fresh data prints coming out of the US may prop up the exchange rate as the Fed’s preferred gauge for inflation is anticipated to increase for the third consecutive month.

Image of DailyFX economic calendar for US

The Core Personal Consumption Expenditure (PCE) Price Index is expected to widen to 3.4% from 3.1% per annum in April, which would mark the highest reading since April 1992, and persist signs of stronger inflation may put pressure on the Federal Open Market Committee (FOMC) to adjust the forward guidance for monetary policy as Chairman Jerome Powell and Co. forecast two rate hikes in 2023.

In turn, a growing number of Fed officials strike a hawkish tone over the coming months as Chairman Powell pledges to “give advance notice before announcing the decision to taper,” and it remains to be seen if the FOMC will alter its guidance at the next interest rate decision on July 28 as “reaching the standard of substantial further progress is still a ways off.”

Until then, the weakness in longer-dated US yields may drag on USD/JPY as the FOMC stays on track to “increase our holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month,” and the recent shift in retail sentiment may continue to abate as the exchange rate carves a series of lower highs and lows from the June high (110.82).

Image of IG Client Sentiment for USD/JPY rate

The IG Client Sentiment report shows 47.04% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 1.13 to 1.

The number of traders net-long is 3.78% higher than yesterday and 22.16% lower from last week, while the number of traders net-short is 0.89% higher than yesterday and 0.44% lower from last week. The decline in net-long interest comes as USD/JPY fails to take out the 2021 high (110.97), while the marginal decline in net-short position has helped to alleviate the crowding behavior as 45.74% of traders were net-long the pair ahead of the Fed rate decision.

With that said, the tilt in retail sentiment may continue to abate as USD/JPY carves a series of lower highs and lows from the June high (110.82), but the update to the PCE Price index may help to prop up the exchange rate as the Fed’s preferred gauge for inflation is expected to print at its highest level since 1992.

USD/JPY Rate Daily Chart

Image of USD/JPY rate daily chart

Source: Trading View

  • USD/JPY approached pre-pandemic levels as a ‘golden cross’ materialized in March, with a bull flag formation unfolding during the same period as the exchange rate traded to a fresh yearly high (110.97).
  • The Relative Strength Index (RSI) showed a similar dynamic as the indicator climbed above 70 for the first time since February 2020, but the pullback from overbought territory has negated the upward trend from this year, which pushed USD/JPY below the 50-Day SMA (109.16) for the first time since January
  • Nevertheless, USD/JPY reversed ahead of the March low (106.37) to largely negate the threat of a head-and shoulders formation, with the exchange rate climbing back above the moving average to take out the May high (110.20) in June.
  • However, USD/JPY appears to have reversed course ahead of the 2021 high (110.97) as it carves a series of lower highs and lows from the monthly high (110.82), with lack of momentum to hold above the Fibonacci overlap around 109.40 (50% retracement) to 110.00 (78.6% expansion) bringing the 108.00 (23.6% expansion) to 108.40 (100% expansion) region back on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong





Read More: USD/JPY Reverses Ahead of 2021 High with US PCE Price Index on Tap

2021-06-21 14:00:00

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