US Dollar Outlook:
- The US Dollar (through the DXY Index) is rebounding alongside Fed charge hike odds and US Treasury yields.
- The DXY Index has discovered assist on the uptrend from the late-March and late-May swing lows, whereas USD/JPY charges have rebounded from the previous highs in April and May.
- The IG Client Sentiment Indexmeans that USD/JPY has a combined bias within the near-term.
The US Dollar’s (through the DXY Index) rebound in latest days has been catalyzed by acquainted forces: US Treasury yields turning larger as near-term Fed charge hike odds improve. Falling as little as 10% after the July Fed assembly, charges markets at the moment are pricing in a 50% likelihood of a 75-bps charge hike in September following hawkish commentary by two notable doves on the FOMC, Minneapolis Fed President Neel Kashkari and San Francisco Fed President Mary Daly.
Alongside the continued rebound in threat urge for food as evidenced by strikes in US equity markets and cryptocurrencies, plus a diminished demand for secure havens after US Speaker of the House Nancy Pelosi’s go to to Taiwan, the Japanese Yen has offered off shortly over the previous few days. The basic catalyst – no Chinese army response to the go to – arrived at a technically opportune time for USD/JPY charges, which had lately returned to former resistance turned assist.
DXY PRICE INDEX TECHNICAL ANALYSIS: DailyTimeframe (August 2021 to August 2022) (CHART 1)
As anticipated, a setback occurred within the DXY Index across the July Fed assembly, seeing the greenback gauge drop under its day by day 21-EMA (one-month shifting common) and again to the rising trendline from the late-March and late-May swing lows. The DXY Index has rebounded shortly, nonetheless, with a bullish outdoors engulfing bar/key reversal forming yesterday, suggesting extra upside potential within the near-term.
While momentum has flattened out – day by day MACD continues to be declining albeit above its sign line whereas day by day Slow Stochastics are simply exiting oversold territory – the greenback gauge is carving out a day by day doji candle at this time, pinned round its day by day 5-, 8-, 13-, and 21-EMAs (that are in neither bearish nor bullish sequential order). The path ahead is quite easy: the DXY Index can proceed its rebound if near-term Fed charge hike odds and US Treasury yields proceed to say no; or a deeper setback might transpire but, ought to Fed charge hike odds and US Treasury yields fall again.
USD/JPY RATE TECHNICAL ANALYSIS: DAILY TIMEFRAME (August 2021 to August 2022) (CHART 2)
After shedding the uptrend from the early-March and late-May swing lows, USD/JPY charges shortly offered off into the realm across the April and May highs, former resistance that turned to assist with the mid-June sell-off (131.25/49). A rally in US equity markets and better US Treasury yields are proving to be a tailwind, though weak point in vitality costs could also be stopping a extra appreciable rebound.
The truth of the matter is with conflicting basic elements, USD/JPY charges are in a little bit of a technical ‘no man’s land,’ having but to retake the multi-month uptrend that outlined the rally for a lot of 2022. Daily MACD continues to be declining by means of its sign line whereas day by day Slow Stochastics are exiting oversold territory, however the pair stays under its day by day 5-, 8-, 13-, and 21-EMA envelope, which stays in bearish sequential order. More worth improvement is required earlier than a directional bias might be discerned.
IG Client Sentiment Index: USD/JPY RATE Forecast (August 3, 2022) (Chart 3)
USD/JPY: Retail dealer information exhibits 39.29% of merchants are net-long with the ratio of merchants brief to lengthy at 1.55 to 1. The variety of merchants net-long is 12.60% decrease than yesterday and 10.68% larger from final week, whereas the variety of merchants net-short is 8.06% larger than yesterday and 20.19% decrease from final week.
We usually take a contrarian view to crowd sentiment, and the very fact merchants are net-short suggests USD/JPY costs might proceed to rise.
Positioning is extra net-short than yesterday however much less net-short from final week. The mixture of present sentiment and up to date adjustments provides us an additional combined USD/JPY buying and selling bias.
— Written by Christopher Vecchio, CFA, Senior Strategist