USD/JPY trades to a fresh monthly low (137.66) to largely track the ongoing weakness in US Treasury yields, and another move below 30 in the RSI is likely to be accompanied by a further decline in the exchange rate like the behavior seen last week.

As a result, USD/JPY may continue to depreciate ahead of the Federal Reserve’s last meeting for 2022 as signs of slowing inflation fuels speculation for a smaller rate hike in December, and it remains to be seen if the US Retail Sales report will influence the exchange rate as the update is anticipated to show a pickup in household consumption.

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Retail spending is expected to increase 1.0% in October after holding flat the month prior, and a positive development may generate a bullish reaction in the US Dollar as it raises the Federal Open Market Committee’s (FOMC) scope to pursue a highly restrictive policy.

In turn, the FOMC may retain its existing approach in combating inflation as Chairman Jerome Powell insists that “it is very premature to be thinking about pausing,” and it remains to be seen if the central bank will adjust the forward guidance at its next interest rate decision on December 14 as Fed officials are slated to update the Summary of Economic Projections (SEP).

Until then, developments coming out of the US may continue to influence USD/JPY amid speculation for a shift in the Fed’s hiking-cycle, but the tilt in retail sentiment looks poised to persist as traders have been net-short the pair for most of the year.

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The IG Client Sentiment (IGCS) report shows 43.91% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 1.28 to 1.

The number of traders net-long is 9.70% lower than yesterday and 0.59% lower from last week, while the number of traders net-short is 1.55% lower than yesterday and 31.26% lower from last week. The marginal decline in net-long position comes as USD/JPY trades to a fresh monthly low (137.66), while the drop in net-short interest has helped to alleviate the crowding behavior as only 35.12% of traders were net-long the pair last week.

With that said, an upbeat US Retail Sales report may prop up the Dollar should the update renew bets for a 75bp Fed rate hike in December, but another move below 30 in the RSI is likely to be accompanied by a further decline in the exchange rate like the price action from earlier this month.

USD/JPY Rate Daily Chart

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Source: Trading View

• USD/JPY clears the September low (138.84) after failing to defend the opening range for November, and the exchange rate may continue to give back the advance from the August low (130.39) as the Relative Strength Index (RSI) continues to flirt with oversold territory.
• Another move below 30 in the RSI is likely to be accompanied by a further decline in USD/JPY like the price action from last week, with a break/close below the 137.30 (38.2% retracement) to 137.80 (316.8% expansion) region opening up the 135.30 (50% expansion) area.
• Need a break/close below the Fibonacci overlap around 132.20 (78.6% expansion) to 133.20 (38.2% expansion) to bring the 130.20 (100% expansion) to 130.60 (23.6% expansion) area on the radar, which incorporates the August low (130.39), but the bearish momentum may abate over the coming days should the RSI hold above 30.
• Need a close above 140.30 (78.6% expansion) to bring the 141.70 (161.8% expansion) area back on the radar, with the next region of interest coming in around the 142.90 (23.6% retracement) to 143.00 (423.6% expansion).

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