USD / JPY rate follows the rally in US yields before the Fed’s rate decision.

Talking points about the Japanese yen

USD / JPY tries to revert back to the dip after semi-annual testimony with Fed Chairman Jerome Powell amid a rally in longer-term US Treasury yields, and the exchange rate may continue appreciating ahead of the Federal Open Market Committee (FOMC) interest rate decision on July 28, as the central bank is expected to maintain current policy.

USD / JPY rate follows the rally in US yields before the Fed’s rate decision.

USD / JPY appears to be following the recovery in US yields, as it extends the advance from the monthly low (109.06) to retreat above the 50-day SMA (109.98) and a Further improvement in risk appetite could keep the exchange rate floating as Fed officials prepare for a temporary surge in inflation.

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It appears that the FOMC will take a step-by-step approach to reducing its emergency measures as President Powell tells US lawmakers that the central bank wants to “Give advance notice of an announcement to reduce the pace of purchases,” and the committee may just trying to buy time before the September quarterly meeting, such as “Overall, it was felt that the Committee’s standard of further substantial progress had not yet been met.”

As a result, more or less the same from the FOMC could undermine the recent USD / JPY rally as it is likely to drag down Treasury yields, but a substantial shift in future monetary policy stance could trigger a backlash. Bullish on the US dollar if the central bank outlines an interim exit strategy.

Until then, USD / JPY could continue to retreat from the monthly high (111.66) amid an improvement in risk appetite, but a further rally in the exchange rate could drive the reversal of retail sentiment, as well as the behavior seen earlier this year.

IG Client Sentiment Report shows 45.73% of traders currently netting long USD / JPY, with the ratio between short and long trader standing at 1.19 to 1.

number of net long traders is 7.79% more than yesterday and 17.82% less than last week, while the number of net short traders is 2.84% lower than yesterday and 10.67 % more than last week. increase in net long position could be a function of profit-taking behavior, as USD / JPY is trading at a new weekly high (110.59), while the increase in net short interest has driven the change. in retail sentiment 49.41% of traders held a net long position on the pair last week.

That said, current market conditions could keep USD / JPY afloat ahead of the Fed’s rate decision, as the exchange rate appears to follow the recovery in US yields and the decline of the annual high (111.66) a broader trend correction could result as the exchange rate recovers from the 50-day SMA (109.98).

USD / JPY daily rate chart

Source: Commercial view

  • USD / JPY has approached pre-pandemic levels as the ‘Golden Cross’ materialized in March, with a bullish flag formation developing around the same time as the exchange rate was trading at a new yearly high (110.97).
  • Relative Strength Index (RSI) showed similar dynamics as the indicator rose above 70 for the first time since February 2020, but the pullout from the overbought territory undermined this year’s uptrend, briefly pushing the USD / JPY below the 50-day SMA (109.98) for the first time since January.
  • However, USD / JPY reversed before the March low (106.37) to largely nullify the threat of head and shoulders formation, with the exchange rate returning above the moving average to hit a new high. annual (111.12) in June.
  • A similar scenario emerged in July as the exchange rate traded at a new annual high (111.66), with the failed attempt to close below the region of 109.40 (50% retracement) to 110.00 (78, 6% expansion), bringing the Fibonacci overlap around 111.10 (61.8% expansion) to 111.60 (38.2% retracement) back on the radar.
  • It needs a breakout / close above the Fibonacci overlap around 111.10 (61.8% expansion) at 111.60 (38.2% retracement) to open the February 2020 high (112.23), with the next area of ‚Äč‚Äčinterest reaching around 112.40 (61.8% decrease). ) to 112.80 (expansion of 38.2%).

– Written by David Song, Currency Strategist

Follow me on @DavidJSong

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