HomeForex MarketUSD/JPY Eyes 2016 High Amid Speculation for Larger Fed Rate Hike

USD/JPY Eyes 2016 High Amid Speculation for Larger Fed Rate Hike

Japanese Yen Talking Points

USD/JPY clears the 2017 high (118.61) as Federal Reserve Chairman Jerome Powell shows a greater willingness to normalize monetary policy at a faster pace, and the exchange rate looks poised to test the 2016 high (121.69) as it tracks the rise in US Treasury yields.

USD/JPY Eyes 2016 High Amid Speculation for Larger Fed Rate Hike

The recent rally in USD/JPY has pushed the Relative Strength Index (RSI) into overbought territory for the second time this year as it trades to a fresh yearly high (121.28), and the bullish price action is likely to persist as long as the oscillator holds above 70.

It seems as though the diverging paths for monetary policy in the US and Japan will keep USD/JPY afloat in 2022 as the Bank of Japan (BoJ) remains in no rush to switch gears, while the Federal Open Market Committee (FOMC) is expected to deliver a more detailed exit strategy as the central bank “expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.

Source: CME

At the same time, a growing number of Fed officials may show a greater willingness to raise US rates at a faster pace as the CME FedWatch Tool now shows a greater than 60% probability for a 50bp rate hike at the next interest rate decision on May 4, and it remains to be seen if Chairman Powell and Co. will adopt a more aggressive approach in normalizing monetary policy as the Russia-Ukraine war clouds the economic outlook.

Until then, USD/JPY may continue to track the rise in US yields as the FOMC looks to implement a series of rate hikes in 2022, but a further appreciation in the exchange rate may continue to fuel the tilt in retail sentiment like the behavior seen during the previous year.

Image of IG Client Sentiment for USD/JPY rate

The IG Client Sentiment report shows only 21.42% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 3.67 to 1.

The number of traders net-long is 5.87% lower than yesterday and 2.28% lower from last week, while the number of traders net-short is 1.40% lower than yesterday and 0.50% higher from last week. The decline in net-long position could be a function of profit-taking behavior as USD/JPY trades to a fresh yearly high (121.28), while the marginal rise in net-short interest has fueled the tilt in retail sentiment as 22.42% of traders were net-long the pair last week.

With that said, the diverging paths between the FOMC and BoJ may continue to push USD/JPY to fresh yearly highs over the remainder of the month, and the bullish price action is likely to persist as long as the RSI holds above 70.

USD/JPY Rate Daily Chart

Image of USD/JPY rate daily chart

Source: Trading View

  • USD/JPY clears the 2017 high (118.61) as it climbs to a fresh yearly high (121.28), with the recent rally in the exchange rate pushing the Relative Strength Index (RSI) into overbought territory for the second time this year.
  • The bullish price action in USD/JPY is likely to persist as long as the RSI holds above 70, with a break/close above the 121.50 (23.6% expansion) region bringing the 2016 high (121.69) on the radar.
  • The next area of interest coming in around 122.40 (78.6% retracement), with a break/close above the 123.10 (61.8% expansion) area opening up the November 2015 high (123.76).
  • Need the RSI to fall back below 70 to indicate a near-term pullback in USD/JPY, with a move below the 120.00 (38.2% expansion) handle bringing the 118.90 (50% expansion) area back on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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