US Dollar Outlook:
- The US Dollar (through the DXY Index) is hovering slightly below its yearly highs whereas USD/JPY charges have damaged the downtrend from the July swing highs.
- Fed Chair Jerome Powell’s Jackson Hole speech will probably catalyze a extra vital transfer within the main USD-pairs.
- The IG Client Sentiment Index means that USD/JPY has a blended bias within the near-term.
Waiting on Powell’s Speech
The previous 48-hours have been relatively uneventful in FX markets. Thin summer season liquidity is responsible, as merchants are unwilling to stake out vital positions forward of Fed Chair Jerome Powell’s speech on the Jackson Hole Economic Policy Symposium on Friday.
While the refrain of Fed policymakers has been relatively hawkish in current weeks, there’s nonetheless the skin probability that Fed Chair Powell takes the same tone to his remarks made on the July FOMC assembly, which impressed market contributors to consider that we’ve moved past peak Fed charge hike odds amidst a slowing US financial system.
That mentioned, with Fed charge hike odds for the September FOMC assembly sitting proper at 50% for a 75-bps charge hike, Fed Chair Powell’s speech is more likely to spark a big transfer throughout all asset courses. What will Fed Chair Powell probably say?
– (1) the US financial system isn’t in a recession;
– (2) if the US financial system is in a recession, it gained’t cease the Fed from elevating charges additional to combat inflation; and
– (3) the result of the September FOMC assembly – both a 50-bps or 75-bps charge hike – can be contingent upon how US information evolves over the approaching weeks.
If Fed Chair Powell speaks in comparable tones to different Fed policymakers over current weeks, it’d assist curb the ‘Fed pivot’ narrative that’s advanced for the reason that July FOMC assembly, but it surely definitely gained’t be a hawkish “whatever it takes” second that echoes the mindset of former Fed Chair Paul Volcker. The shakeout in value motion might imply volatility, however no discernible new directional bias within the main USD-pairs.
DXY PRICE INDEX TECHNICAL ANALYSIS: DailyTimeframe (August 2021 to August 2022) (CHART 1)
The DXY Index rallied again in the direction of its yearly highs this week earlier than pausing. Consolidating into an ascending triangle, the greenback gauge retains its potential for a bullish breakout to recent yearly highs. The momentum construction stays bullish, with the DXY Index above its each day 5-, 8-, 13-, and 21-EMA envelope, which stays in bullish sequential order. Daily MACD is trending larger above its sign line, whereas each day Slow Stochastics are holding in overbought territory. A weekly shut above 109.29 would recommend that the consolidation has ended, yielding to the subsequent leg larger.
USD/JPY RATE TECHNICAL ANALYSIS: DAILY TIMEFRAME (August 2021 to August 2022) (CHART 2)
After rallying by way of the July swing highs, USD/JPY charges have paused the previous few days, clinging to the trendline as if it point out that merchants are unsure about whether or not or not there’s purpose to both breakout or breakdown once more. A push larger from right here would carry the yearly excessive at 139.39 into focus, whereas a drop beneath the July swing highs would shift consideration again to the ascending trendline from the March and August swing lows nearer to 133.00 by the tip of the month.
IG Client Sentiment Index: USD/JPY RATE Forecast (August 25, 2022) (Chart 3)
USD/JPY: Retail dealer information exhibits 27.66% of merchants are net-long with the ratio of merchants quick to lengthy at 2.62 to 1. The variety of merchants net-long is 4.98% larger than yesterday and 5.22% decrease from final week, whereas the variety of merchants net-short is 1.10% decrease than yesterday and 16.67% larger from final week.
We sometimes 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 much less net-short than yesterday however extra net-short from final week. The mixture of present sentiment and up to date modifications provides us an additional blended USD/JPY buying and selling bias.
— Written by Christopher Vecchio, CFA, Senior Strategist