USD/JPY Rate on Track for Three-Day Decline as RSI Sell Signal Emerges

Japanese Yen Talking Points

USD/JPY is on observe to mark a three-day decline even because the 10-Year US Treasury yield climbs to a recent month-to-month excessive (1.71%), and the alternate price might face a bigger pullback over the rest of the month because the Relative Strength Index (RSI) presents a textbook promote sign.

USD/JPY Rate on Track for Three-Day Decline as RSI Sell Signal Emerges

USD/JPY trades to a recent weekly low (113.62) as a rising variety of Federal Reserve officers warn of a weaker-than-expected restoration, and the alternate price might proceed to consolidate in the course of the Fed’s blackout interval because the central financial institution appears to progressively cut back financial help.

During a speech at 2021 Milken Institute Global Conference, fed governor Randal Quarles acknowledged that “growth in the third quarter is likely to be lower than we had expected,” with the official going onto say that “supply bottlenecks and labor shortages that have been more widespread and persistent than many expected

However, the Governor Quarles insists that these developments “have for the most part simply postponed activity temporarily and that robust growth will return in the coming months,” and the feedback counsel the Federal Open Market Committee (FOMC) will keep on observe to cut back financial help because the official stays “quite optimistic about the capacity and willingness of consumers and businesses to power a robust expansion

As a result, it seems as though FOMC will stick to its exit strategy as Governor Quarles “would support a decision at our November meeting to start reducing these purchases and complete that process by the middle of next year,” and the deviating paths between the Fed and Bank of Japan (BoJ) might hold USD/JPY afloat as longer-dated US yields proceed to retrace the decline from earlier this yr.

Nevertheless, current worth motion raises the scope for a bigger pullback in USD/JPY because the Relative Strength Index (RSI) falls again from overbought territory to supply a textbook promote sign, however the tilt in retail sentiment appears poised to persist because the alternate price extends the bullish development from earlier this yr.

Image of IG Client Sentiment for USD/JPY rate

The IG Sentiment Client report exhibits solely 23.07% of merchants are presently net-long USD/JPY, with the ratio of merchants quick to lengthy standing at 3.33 to 1.

The variety of merchants net-long is 4.15% decrease than yesterday and seven.97% decrease from final week, whereas the variety of merchants net-short is 2.52% larger than yesterday and 15.09% larger from final week. The decline in net-long curiosity comes as USD/JPY marks the primary three-day decline since August, whereas the rise in net-short place comes because the RSI presents a textbook sign.

With that mentioned, USD/JPY might exhibit a bullish development all through the rest of the yr amid the continuing restoration in longer-dated Treasury yields, however the alternate price might face a bigger correction forward of the subsequent Fed price resolution on November 3 because the alternate price extends the collection of decrease highs and lows from earlier this week.

USD/JPY Rate Daily Chart

Image for USD/JPY rate daily chart

Source: Trading 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 (109.15) indicating an identical dynamic because it retains the optimistic slope from earlier this yr.
  • The Relative Strength Index (RSI) confirmed an identical dynamic as it pushed into overbought territory for the primary time because the first quarter of 2021, however current developments warn of a bigger pullback in USD/JPY because the oscillator falls again from overbought territory to supply a textbook promote sign.
  • In flip, USD/JPY seems to have reversed course forward of the November 2017 excessive (114.74), with lack of momentum to maintain above the Fibonacci overlap round 113.80 (23.6% enlargement) to 114.30 (23.6% retracement) bringing the 112.40 (61.8% retracement) to 112.80 (38.2% enlargement) area again on the radar.
  • Next space of ​​curiosity is available in round 111.10 (61.8% enlargement) to 111.60 (38.2% retracement), with a transfer under the 50-Day SMA (110.95) opening up the 109.40 (50% retracement) to 110.00 (38.2% enlargement) area.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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