USD/JPY Edges Lower as DXY Reversal Gathers Pace

US Dollar Outlook:

US CPI on the Horizon

The upcoming August US inflation report (CPI) should offer additional evidence that peak inflation is in the rearview mirror. Softer readings could translate into diminished Fed rate hike odds, which while good news for US stocks and gold prices, would be bad news for the US Dollar. The potentially bearish fundamental catalyst is arriving at an inopportune time for the greenback, with signs of technical weakness beginning to mount across the major USD-pairs.

DXY PRICE INDEX TECHNICAL ANALYSIS: DailyTimeframe (September 2021 to September 2022) (CHART 1)

With the close last week, the DXY Index returned into the multi-month ascending triangle consolidation, suggesting that the US Dollar more broadly may be biased towards more weakness the near-term. The technical outlook has become more bearish in recent days. The DXY Index is below its daily 5-, 8-, 13-, and 21-EMAs, but the moving average envelope is not yet in bearish sequential order. A noteworthy development is that the DXY Index is now below its daily 21-EMA (one-month moving average) for the first time since August 12. Momentum indicators are exhibiting bearish tendencies as well. Daily MACD is falling while above its signal line and daily Slow Stochastics have dropped below their median line. A drop below the late-August swing low of 107.59 would suggest a top has formed.

USD/JPY RATE TECHNICAL ANALYSIS: DAILY TIMEFRAME (September 2021 to September 2022) (CHART 2)

After rallying to fresh yearly highs last week – and the highest level since August 1998 – USD/JPY rates reversed sharply at the end of the week, though the pullback has not been deep enough to suggest that a turn is afoot. Among the three major USD-pairs, USD/JPY rates offer the least confidence in US Dollar weakness, insofar as momentum remains quite bullish. The pair is still above the daily 5-, 8-, 13-, and 21-EMA envelope in its entirety. Daily MACD is still trending higher while above its signal line, and daily Slow Stochastics remain in overbought territory. If the US Dollar is to selloff over the coming days, USD/JPY rates may be the laggard relative to EUR/USD and GBP/USD rates.

IG Client Sentiment Index: USD/JPY RATE Forecast (September 12, 2022) (Chart 3)

USD/JPY: Retail trader data shows 24.91% of traders are net-long with the ratio of traders short to long at 3.01 to 1. The number of traders net-long is 15.66% higher than yesterday and 0.46% higher from last week, while the number of traders net-short is 2.94% higher than yesterday and 0.46% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/JPY prices may continue to rise.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current USD/JPY price trend may soon reverse lower despite the fact traders remain net-short.

— Written by Christopher Vecchio, CFA, Senior Strategist