USD/JPY Correction to Persist Amid Weakness in US Treasury Yields

Japanese Yen Speaking Factors

USD/JPY provides again the advance from the beginning of the week amid the current weak point in longer-dated US Treasury yields, and the alternate fee might face a bigger pullback over the rest of the month because the Relative Power Index (RSI) continues to fall again from overbought territory.

USD/JPY Correction to Persist Amid Weak spot in US Treasury Yields

USD/JPY tags a recent weekly low (113.39) following the restricted response to the smaller-than-expected decline in US Sturdy Items Orders, and the alternate fee might proceed to consolidate forward of the Federal Reserve rate of interest determination on November 3 because the 10-12 months Treasury yield weakens for the fourth consecutive day.

Image of DailyFX Economic Calendar for US

It stays to be seen if the current US knowledge prints will affect the Federal Open Market Committee (FOMC) as demand for large-ticket objects contracts 0.4% in September versus projections for a 1.1% decline, however indications of a much less sturdy restoration might generate a bigger correction in USD/JPY because the replace to the Gross Home Product (GDP) report is anticipated to point out the expansion fee rising 2.7% after increasing 6.7% within the second quarter of 2021.

Consequently, a marked slowdown within the US economic system might produce headwinds for the Greenback because it places strain on the Fed to delay its exit technique, however a optimistic growth might generate a bullish response in USD/JPY because the FOMC plans to reduce is purchases of Treasury securities and mortgage-back securities (MBS) later this yr.

In flip, the pullback from the month-to-month excessive (114.70) might transform a correction within the broader development amid the deviating paths between the Fed and Financial institution of Japan (BoJ), however an extra decline in USD/JPY might proceed to alleviate the lean in retail sentiment just like the behaver seen earlier this yr.

Image of IG Client Sentiment for USD/JPY rate

The IG Consumer Sentiment report reveals 27.68% of merchants are at the moment net-long USD/JPY, with the ratio of merchants brief to lengthy standing at 2.61 to 1.

The variety of merchants net-long is 16.96% decrease than yesterday and 5.94% decrease from final week, whereas the variety of merchants net-short is 6.97% decrease than yesterday and eight.35% decrease from final week. The decline in net-long place comes as USD/JPY tags a recent weekly low (113.39), whereas the drop in net-short curiosity has helped to alleviate the lean in retail sentiment as solely 23.07% of merchants have been net-long the pair final week.

With that mentioned, USD/JPY might proceed to consolidate forward of the following Fed fee determination amid the weak point in longer-dated US yields, and up to date developments within the Relative Power Index (RSI) raises the scope for an extra decline within the alternate fee because the indicator falls again from overbought territory to mirror a textbook promote sign.

USD/JPY Charge Day by day Chart

Image of USD/JPY rate daily chart

Supply: Buying and selling View

  • The broader outlook for USD/JPY stays constructive because it trades to recent yearly highs within the second half of 2021, with the 200-Day SMA (109.30) indicating an identical dynamic because it retains the optimistic slope from earlier this yr.
  • The Relative Power Index (RSI) confirmed an identical dynamic as it pushed into overbought territory for the primary time for the reason that first quarter of 2021, however current developments warn of a bigger pullback in USD/JPY because the oscillator falls again from overbought territory to supply a textbook promote sign.
  • In flip, USD/JPY seems to have reversed course forward of the November 2017 excessive (114.74), and lack of momentum to climb again above the Fibonacci overlap round 113.80 (23.6% growth) to 114.30 (23.6% retracement) retains the 112.40 (61.8% retracement) to 112.80 (38.2% growth) area on the radar because the bullish momentum seems to be abating.
  • Subsequent space of curiosity is available in round 111.10 (61.8% growth) to 111.60 (38.2% retracement), which traces up with the 50-Day SMA (111.21), adopted by the 109.40 (50% retracement) to 110.00 (38.2% growth) area.

— Written by David Tune, Forex Strategist

Comply with me on Twitter at @DavidJSong


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