JPY technical outlook: the market looks for cues from the Fed

USD/JPY short-term technical forecast – neutral

The Japanese yen’s rally against the US dollar appears to have stalled in recent days as the market looks for further cues from the upcoming US Federal Reserve Open Market Committee meeting.

• Price facts

USD/JPY (大口） is holding above quite strong support at the May low of 126.30. Top side continues to be capped at the mid-January high of 131.60, keeping the pair in a range.

• Sentiment

IG Client Sentiment data shows 41% of traders are net-long USD/JPY (大口）, 59% of the traders are net-short the pair. The number of traders net-long is 2% higher from last week, while the number of traders net-short is 11% higher from last week.

• Narrative

While BOJ remains committed to its current extremely accommodative monetary policy stance, the general perception is that the Japanese central bank is edging toward a shift to a tighter stance at some point on accelerating inflation, i.e. a question of when and not if, supporting JPY. In contrast, the US Fed is expected to reduce the pace of its rate increases. A recent fund manager survey showed JPY appreciation expectations are now highest since January 2007 (the last BOJ rate hiking cycle).

While the market widely expects the Fed to hike rates by 25 basis points to 4.5%-4.75% on Wednesday, the accompanying statement will be closely watched, particularly if the Fed signals it is reaching an inflection point in the rate hiking cycle.

If the Fed is less hawkish than expected, it could weigh on the US dollar. The futures market currently expects rates to top around 4.9% on growing signs that US inflation could be peaking.

USD/JPY weekly chart

This comes as USD/JPY (大口） tests a vital support zone: the 89-week moving average, coinciding with the May 2022 low of 126.30 (see weekly chart). The recent pattern does give an impression of some sort of base building taking place, but the momentum continues to be on the downside, though faded a bit recently.

Unless USD/JPY (大口） breaks above immediate resistance at the mid-January high of 131.60, the path of least resistance remains sideways/slightly down.

USD/JPY 240-minutes chart

Any break above the 89-period moving average on the 240-minute chart, near the upper edge of a declining channel since November, around 131.60, would be an indication that the three-month-long downward pressure is fading.

Moreover, on the daily charts, the stalling of momentum even as the price made a fresh low earlier this month could be a sign that the slide is losing steam.

IG Client Sentiment report January 31, 2023

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