US Dollar Outlook:
- The US Dollar (through the DXY Index) is falling within the wake of the July US inflation report as US Treasury yields and Fed price hike odds drop.
- The DXY Index has misplaced assist on the uptrend from the late-March and late-May swing lows, whereas USD/JPY charges are fading in the direction of former highs in April and May.
- The IG Client Sentiment Index means that USD/JPY has a blended bias within the near-term.
Yields Move Everything
The sudden deceleration in US inflation charges in July is weighing down US Treasury yields and slicing down Fed price hike odds within the near-term. The odds of a 75-bps price hike in September have dipped again beneath 50%, the place that they had been for the previous a number of days within the wake of the blowout July US jobs report. The knock-on impact in monetary markets has been a weaker US Dollar, with the DXY Index breaking beneath multi-month uptrend assist and USD/JPY charges turning decrease in the direction of the August lows.
DXY PRICE INDEX TECHNICAL ANALYSIS: DailyTimeframe (August 2021 to August 2022) (CHART 1)
The drop by the DXY Index has seen the bullish exterior engulfing bar/key reversal low taken out, suggesting that the latest bullish impulse has failed. Concurrent with the break of the uptrend from the late-March and late-May swing lows, there’s rising technical proof {that a} near-term high has been carved out. Momentum is popping bearish rapidly. The DXY Index is beneath its each day 5-, 8-, 13-, and 21-EMAs, that are aligning in bearish sequential order. Daily MACD is dropping beneath its sign line whereas each day Slow Stochastics have reversed again beneath their median line. A deeper setback by the DXY Index might quickly playout in the direction of the mid-June swing low at 103.42.
USD/JPY RATE TECHNICAL ANALYSIS: DAILY TIMEFRAME (August 2021 to August 2022) (CHART 2)
The rally by USD/JPY charges from the realm across the April and May highs has ended, with a bearish exterior engulfing bar forming on the each day chart as we speak. Momentum is quickly shifting extra bearish. The pair is beneath its each day 5-, 8-, 13-, and 21-EMAs, which are actually in bearish sequential order. Daily MACD is continuous its transfer beneath its sign line whereas each day Slow Stochastics have reversed again beneath their median line. A return to the August low at 130.91 seems more and more doubtless within the near-term.
IG Client Sentiment Index: USD/JPY RATE Forecast (August 10, 2022) (Chart 3)
USD/JPY: Retail dealer information reveals 38.71% of merchants are net-long with the ratio of merchants brief to lengthy at 1.58 to 1. The quantity of merchants net-long is 4.10% decrease than yesterday and 6.14% decrease from final week, whereas the quantity of merchants net-short is 12.73% decrease than yesterday and three.81% decrease from final week.
We sometimes take a contrarian view to crowd sentiment, and the actual fact merchants are net-short suggests USD/JPY costs might proceed to rise.
Positioning is much less net-short than yesterday however extra net-short from final week. The mixture of present sentiment and up to date adjustments provides us an extra blended USD/JPY buying and selling bias.
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— Written by Christopher Vecchio, CFA, Senior Strategist