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USD / JPY is prone to a larger correction as the RSI develops a downward trend


The theme of the Japanese yen

USD / JPY initiates a series of higher highs and lows after the end of the opening range in May, but recent developments in the Relative Strength Index (RSI) open up opportunities for a larger exchange rate rollback as the momentum indicator develops a downward trend.

USD / JPY is prone to a larger correction as the RSI develops a downward trend

USD/JPY continues to track US Treasury profitability fluctuations, extending the rebound from the monthly low (127.52), and remains to be seen whether the latest data from the U.S. will affect the exchange rate, as the retail sales report is expected to show growth in domestic consumption.

Retail spending is projected to rise 0.9% in April after an increase of 0.5% in the previous month, and signs of a sustainable economy may prompt the Chairman of the Federal Reserve Jerome Powell to prepare US households and businesses for higher interest rates, as the head of the central bank is scheduled to speak at an event Wall Street Magazine.

As a result, expectations of a further shift in Fed policy may keep the USD / JPY afloat and the central bank on the way to «significantly reduce the size of our balance sheet over time in a predictable way”, And the decline from the annual high (131.35) may be a correction of a broader trend amid differences between Federal Open Market Committee (FOMC) and Bank of Japan (BoJ).

Keep in mind that the difference between the price and the RSI creates opportunities for a larger rollback in USD / JPY as the oscillator tends to decline in May, but the tilt in retail sentiment seems to persist despite the recent exchange rate rebound as traders have been net-shorts couple from late January.

Image of IG Client Sentiment for USD / JPY

The IG Customer Sentiment Report only shows 26.83% of traders currently net-long USD / JPY, with the ratio of traders short and long standing at 2.73 to 1.

The number of net-long traders is 0.73% less than yesterday, and 6.55% less than last week, while the number of net-short traders is 8.44% higher than yesterday, and 3 , 65% higher than last week. A decrease in net long position occurs when the USD / JPY continues to rebound from monthly minimum (127.52), while rising interest in the net short pair last week spurred crowd behavior, as last week 27.86% of traders were net-long.

With that said, US Dollar may rise against its Japanese counterpart in 2022 as the FOMC normalizes monetary policy long before the Bank of Japan, but the RSI may continue to show a bullish momentum that weakens as the downward trend develops, even as the USD / JPY trades to a new annual high (131.35) earlier this month.

USD / JPY daily schedule

Image of the daily schedule of the USD / JPY exchange rate

Source: Trade view

  • USD / JPY seemed on the way to check Maximum in April 2002 (133.82) as the bull flag formation materialized last month, but a recent price action warns of a short-term exchange rate correction as it cannot protect the opening range for May.
  • At the same time, Relative Strength Index (RSI) set a downward trend as it continues to retreat from overbought territory, and lack the impetus to push back above 129.40 (261.8% expansion) to 130.20 (100% expansion) region may lead to breakout / closure below Fibonacci overlap by about 126.20 (78.6% expansion) to 127.20 (23.6% rollback) when the recent series of highs and lows of the exchange rate unravels.
  • In turn, the USD / JPY may try to test the 50-day SMA (124.97) for the first time since March, with movements below the moving average bringing the radar area to 124.50 (38.2% rollback).

— Written by David Song, currency strategist

Follow me on Twitter at @DavidJSong


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