USD/JPY remains under pressure even as the Federal Reserve delivers a 25bp rate-hike at its last meeting for 2018, and the pickup in volatility fuels a shift in retail sentiment, with recent price action raising the risk for a further decline in the exchange rate as it extends the series of lower highs & lows from earlier this week.

POST-FED USD/JPY RATE SELLOFF FUELS SHIFT IN RETAIL SENTIMENT

Fresh remarks from the Federal Open Market Committee (FOMC) suggest the central bank has no intentions of abandoning the hawkish forward-guidance for monetary policy as ‘it is more likely that the economy will grow in a way that will call for two interest rate increases over the course of next year.’

In turn, Chairman Jerome Powell & Co. may continue to prepare U.S. households and businesses for higher borrowing costs as ‘the projections of Committee participants released today show growth continuing at healthy levels, the unemployment rate falling a bit further next year, and inflation remaining near 2 percent,’ but it appears as though the Fed is approaching the end of the hiking-cycle as officials ‘see growth moderating ahead’.

Even though the updated projections from Chairman Powell & Co. suggest the central bank will continue to normalize monetary policy in 2019, Fed Fund Futures reflect expectations for a wait-and-see approach as the FOMC is anticipated to stay on hold throughout the first half of the year. As a result, USD/JPY appears to be tracking the decline in U.S. Treasury yields as both of instruments slip to fresh monthly lows, and failure to preserve the opening range for December keeps the downside targets for the dollar-yen exchange rate especially as the pickup in volatility fuels the recent shift in retail sentiment.

The IG Client Sentiment Report shows 58.1%of traders are now net-long USD/JPY compared 55.9% earlier this week, with the ratio of traders long to short at 1.39 to 1. In fact, the percentage of traders net-long is now its highest since October 16 when USD/JPY traded near 112.30. The number of traders net-long is 1.9% higher than yesterday and 33.0% higher from last week, while the number of traders net-short is 10.3% lower than yesterday and 34.8% lower from last week.

The drop in net-short position is indicative of profit-taking behavior as USD/JPY slips to fresh monthly lows, but the persistent rise in net-long interest offers a contrarian view to crowd sentiment as the series of failed attempt to test the 2018-high (114.55) warns of a larger correction. At the same time, developments in Relative Strength Index (RSI) warrants attention as the oscillator snaps the upward trend from earlier this year, with a break below 30 raising the risk for a further decline in USD/JPY as the bearish momentum gathers pace.

USD/JPY DAILY CHART

(Click on image to enlarge)

• With the near-term outlook for USD/JPY remains capped by the 113.80 (23.6% expansion) to 114.30 (23.6% retracement) region, the lack of momentum to test the 2018-high (114.55) has opened up the downside targets especially as the exchange rate falls to preserve the monthly opening range.
• In turn, USD/JPY appears to be on its way to test the October-low (111.38), with a close below the 111.10 (61.8% expansion) to 111.80 (23.6% expansion) region opening up the next downside area of interest around 109.40 (50% retracement) to 110.00 (78.6% expansion).