USD/JPY Trades in Bull Flag Formation Ahead of FOMC Rate Decision

Japanese Yen Speaking Factors

USD/JPY continues to consolidate inside a bull flag formation as longer-dated US Treasury yields stay below stress, however the Federal Reserve rate of interest resolution is more likely to affect the alternate price because the central financial institution seems to be on observe to cut back financial assist.

USD/JPY Trades in Bull Flag Formation Forward of FOMC Price Determination

USD/JPY trades inside a slender vary because the Federal Open Market Committee (FOMC) is predicted preserve the benchmark rate of interest on the report low, and it stays to be seen if the central financial institution will taper its purchases of Treasury securities and mortgage-backed securities (MBS) amid expectations for a pickup in financial exercise.

Image of Atlanta Fed GDPNow Forecast

In keeping with the Atlanta Fed, “the GDPNow mannequin estimate for actual GDP development (seasonally adjusted annual price) within the fourth quarter of 2021 is 8.2 p.c on November 1, up from 6.6 p.c on October 29,” and forecasts for a marked rise within the development price could encourage Chairman Jerome Powell and Co. to cut back financial assist as minutes from the September assembly emphasize that “the labor market had continued to indicate enchancment because the Committee’s earlier assembly.

Because of this, USD/JPY could try to interrupt out of the bull flag formation if the Fed begins to cut back financial assist, and the alternate price could exhibit a bullish development all through the rest of the 12 months because the Financial institution of Japan (BoJ) sticks to its Quantitative and Qualitative Easing (QQE) program with Yield-Curve Management (YCC).

In flip, the pullback from the October excessive (114.70) could transform a correction within the broader development as hypothesis for a change in regime lifts US yields, however an extra decline in USD/JPY could proceed to alleviate the lean in retail sentiment just like the habits seen earlier this 12 months.

Image of IG Client Sentiment for USD/JPY rate

The IG Consumer Sentiment report exhibits 31.15% of merchants are at present net-long USD/JPY, with the ratio of merchants quick to lengthy standing at 2.21 to 1.

The variety of merchants net-long is 3.40% greater than yesterday and 15.16% greater from final week, whereas the variety of merchants net-short is 3.87% greater than yesterday and a pair of.58% decrease from final week. The rise in net-long curiosity has helped to alleviate the lean in retail sentiment as 27.68% of merchants have been net-long USD/JPY final week, whereas the decline in net-short curiosity comes because the alternate price trades in a slender vary.

With that mentioned, the deviating paths between the FOMC and BoJ could preserve USD/JPY afloat all through the rest of the 12 months, however a delay within the Fed’s exit technique could produce headwinds for the Greenback forward of the US Non-Farm Payrolls (NFP) report on faucet for later this week as market members push out bets for greater rates of interest.

USD/JPY Price Every 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 (109.56) indicating an analogous dynamic because it retains the constructive slope from earlier this 12 months.
  • The Relative Power Index (RSI) confirmed an analogous dynamic because it pushed into overbought territory for the primary time because the first quarter of 2021, however a textbook promote sign materialized in October because the oscillator fell again from overbought territory to slide beneath 70.
  • Nonetheless, the pullback from the October excessive (114.70) could transform a correction within the broader development as USD/JPY seems to be buying and selling inside a bull flag formation, however want a break/shut above the Fibonacci overlap round 113.80 (23.6% enlargement) to 114.30 (23.6% retracement) to carry the November 2017 excessive (114.74) on the radar.
  • Subsequent space of curiosity is available in round 115.90 (100% enlargement) to 116.10 (78/6% enlargement) adopted by the overlap round 117.60 (23.6% retracement) to 117.90 (23.6% retracement).
  • Nevertheless, lack of momentum to push again above the overlap round 113.80 (23.6% enlargement) to 114.30 (23.6% retracement) could push USD/JPY again in the direction of the 112.40 (61.8% retracement) to 112.80 (38.2% enlargement) region, with the following space of curiosity coming in round 111.10 (61.8% enlargement) to 111.60 (38.2% retracement).

— Written by David Track, Forex Strategist

Comply with me on Twitter at @DavidJSong


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