A bigger pullback possible for the DXY index, USD/JPY
US Dollar Outlook:
- The US Dollar (via DXY Index) is teetering along a key support level, its daily 21-EMA (one-month moving average).
- If the DXY index closes below its daily 21-EMA for the first time since June 7, it could signal a deeper retracement to come.
- The IG Customer Opinion Index suggests that USD/JPY has a short-term bearish bias.
Future prospects for the Fed
The US dollar (via DXY Index) skip to new yearly highs was short-lived. The June US inflation report led to speculation that the Federal Reserve could raise rates by 100 basis points this month, with rates markets pricing in more than a 50% chance of such a move. However, comments from St. Louis Fed President James Bullard and Fed Governor Christopher Waller quickly threw cold water on those hopes. Now, less than a week before the Fed’s July meeting, rates markets are discounting less than a 15% chance that a 100 basis point rate hike will be imposed.
Combined with euro speculation around the European Central Bank‘s rate decision in July, the pullback in Fed rate hike odds has cut the sails of the US dollar somewhat. And with the rally in US equity markets, the momentum that had driven USD/JPY rates higher in recent months – a stronger US dollar being bad for risk – reversed. Now faltering at a key technical level, a deeper pullback in the DXY index cannot be ruled out, which could be good news for US equities, but would likely be more difficult in the near term for USD/JPY rates as well. .
DXY PRICE INDEX TECHNICAL ANALYSIS: Daily Timeframe (July 2021 to July 2022) (CHART 1)
On July 11, it was noted “There is still a magnet for price to reach a little higher: 109.14, the 76.4% Fibonacci retracement of the 2001 high/2008 low range.” The DXY index briefly touched this level, trading as high as 109.29 before reversing lower. The setback of the past week and more now sees the greenback gauge retesting its daily 21-EMA (one-month moving average), which it hasn’t closed below since June 7. A drop below the daily 21-EMA would suggest a deeper retracement is possible, at least to the June high at 105.79 in the short term, followed by 103.42 thereafter. On the other hand, a rise in the daily 5-EMA would warrant a more bullish near-term outlook, seeking a return to the yearly high at 109.29.
USD/JPY RATE TECHNICAL ANALYSIS: DAILY TIMETABLE (July 2021 to July 2022) (CHART 2)
With risk appetite improving and energy prices receding, USD/JPY rates have seen some weakness over the past week. The pair never quite reached the measured move equidistant from the symmetrical triangle range in late June/early July at 139.74, suggesting near-term exhaustion. Today’s candlestick takes the form of a bearish outer engulfing bar, hinting at further declines. Momentum is eroding, with the pair below its daily 5 and 8-EMA (although the daily EMA envelope remains in sequential bullish order). The daily MACD started to decline albeit above its signal line, while the daily Slow Stochastic broke out of overbought territory. A return to the zone between the daily 21-EMA and the June high (136.65/137.00) is possible over the next few days.
IG Customer Confidence Index: USD/JPY rate forecast (July 21, 2022) (Chart 3)
USD/JPY: Retail trader data shows 32.23% of traders are net long with a ratio of short to long traders of 2.10 to 1. The number of traders net long is 2.43% higher than that of yesterday and 28.86% higher than last week, while the number of net-short traders is 3.68% lower than yesterday and 9.06% lower than last week.
We generally take a contrarian view of crowd sentiment, and the fact that traders are net short suggests that USD/JPY prices may continue to rise.
Still, traders are less net-short than yesterday and compared to last week. Recent sentiment shifts warn that the current USD/JPY price trend may soon reverse lower despite traders remaining net short.
— Written by Christopher Vecchio, CFA, Senior Strategist