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USD / JPY trades in bullish flag formation ahead of FOMC rate decision

By on November 3, 2021 0

Japanese Yen Talking Points

The USD / JPY continues to consolidate in a bullish flag formation as longer-term US Treasury yields remain under pressure, but the Federal Reserve’s interest rate decision is likely to influence the exchange rate as the central bank appears to be on the right track to reduce monetary support.

USD / JPY trades in bullish flag formation ahead of FOMC rate decision

The USD / JPY is trading in a narrow range as the Federal Open Market Committee (FOMC) is expected to keep the benchmark interest rate at an all-time high, and it remains to be seen whether the central bank will reduce its purchases of securities from the. Treasury and mortgage backed. securities (MBS) in a context of anticipation of a recovery in economic activity.

According to the Atlanta Fed, “tThe GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2021 is 8.2% as of November 1. against 6.6% on October 29, and forecasts of a marked increase in the growth rate could encourage the president Jerome Powell and Co. to reduce their monetary support over time September meeting report underline that “the labor market has continued to improve since the last meeting of the commission.

As a result, the USD / JPY may attempt to break out of the bullish flag formation if the Fed begins to reduce its monetary support, and the exchange rate may show an uptrend throughout the rest of the year as the Fed begins to reduce its monetary support. Bank of Japan (BoJ) is sticking to its quantitative and qualitative easing (QQE) program with Yield-Curve Control (YCC).

In turn, the decline of October high (114.70) may turn out to be a correction in the larger trend as regime change speculation raises US yields, but a further decline in USD / JPY may continue to dampen the tilt in retail sentiment like the behavior seen earlier this year.

Image of IG client sentiment for the USD / JPY rate

The IG Customer Sentiment Report shows 31.15% of traders are currently net-long USD / JPY, with the ratio of short / long traders upright to 2.21 to 1.

The number of net-long traders is 3.40% higher than yesterday and 15.16% higher than last week, while the number of net-short traders is 3.87% higher than yesterday and 2 , 58% lower than last week. The rise in net long interest helped soften the tilt in retail sentiment as 27.68% of traders were net long USD / JPY last week, while the decline in net short interest comes as the exchange rate is trading within a narrow range.

That said, the diverging paths between the FOMC and the BoJ could keep the USD / JPY afloat for the rest of the year, but a delay in the Fed’s exit strategy could produce headwinds for the dollar ahead of the US Non-Farm Wages (NFPs) report on tap for later this week as market participants push bets for higher interest rates.

Daily USD / JPY rate chart

Image of the daily USD / JPY rate chart

Source: Trading view

  • The broader outlook for USD / JPY remains constructive as it trades at new annual highs in the second half of 2021, with the 200-day SMA (109.56) indicating a similar dynamic as it retains the positive slope of the beginning of this year.
  • The Relative Strength Index (RSI) showed a similar dynamic entering overbought territory for the first time since Q1 2021, but a textbook sell signal materialized in October as the oscillator fell from overbought territory to below 70.
  • Nevertheless, the the pullback from the October high (114.70) could prove to be a correction to the general trend as USD / JPY appears to be trading in a bullish flag formation, but needs a break / close above the Fibonacci overlaps around 113.80 (23.6% expansion) to 114.30 (23.6% retracement) bring the November 2017 high (114.74) on the radar.
  • The next area of ​​interest is around 115.90 (100% expansion) to 116.10 (78/6% expansion), followed by the overlap of around 117.60 (23.6% retracement) to 117.90 (23.6% retracement).
  • However, the lack of momentum to push back above the overlap around 113.80 (23.6% expansion) to 114.30 (23.6% retracement) could push the USD / JPY back towards the 112.40 (61.8% retracement) to 112.80 (38.2% expansion) region, with the next area of ​​interest coming around 111.10 (61.8% expansion) at 111.60 (38.2% retracement).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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