USD/JPY Susceptible To Larger Pullback As RSI Sell Signal Emerges

USD/JPY extends the series of lower highs and lows from earlier this week to largely track the pullback in longer-dated US Treasury yields, and the bearish price sequence may push the exchange rate towards former resistance as it searches for support.

It remains to be seen if the decline from the March high (110.97) will turn out to be a correction or a shift in trend as a ‘golden cross’ takes shape in 2021, and the broader rise in longer-dated Treasury yields may keep the exchange rate afloat as the above-forecast print for US Non-Farm Payrolls (NFP) puts pressure on the Federal Reserve to scale back its emergency measures.

Image of DailyFX economic calendar for US

However, the Federal Open Market Committee (FOMC) appears to be in no rush to switch gears as the central back stays on track to “increase our holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month,” and the minutes from the March meeting may underscore a dovish forward guidance for monetary policy as most Fed officials see the benchmark interest rate siting near zero through 2023.

In turn, the FOMC Minutes may keep USD/JPY under pressure if Chairman Jerome Powell and Co. show a greater willingness to address the rise longer-dated US Treasury via ‘Operation Twist,’ but more of the same from the Fed may prop up the exchange rate as fresh data prints coming out of the US economy point to a stronger recovery.

Image of IG Client Sentiment for USD/JPY rate

Meanwhile, the appreciation in USD/JPY has spurred a shift in retail sentiment as traders flip net-short for the second time this year, with the IG Client Sentiment report showing 43.85% of traders currently net-long the pair as the ratio of traders short to long at 1.28 to 1.

The number of traders net-long is 12.46% higher than yesterday and 10.09% higher from last week, while the number of traders net-short is 5.93% lower than yesterday and 3.80% lower from last week. The rise in net-long position has helped to alleviate the tilt in retail sentiment as 40.56%, while the decline in net-short interest could be a function of profit-taking behavior as USD/JPY bounce back from a fresh weekly low (109.58).

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