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USDJPY could drop in step with UST yields following this week’s FOMC

The US dollar is in a range and the USDJPY is not being affected by safe-haven flows into the yen, as the US dollar looks steadily robust against the yen. The higher rates in the UST’s are attractive to carry traders but that may mean the USDJPY drops if the FOMC signals even less concern over inflation and the UST’s drop lower from their March high.

USDJPY Forex Analysis

Inflation expectations are changing in the US treasury markets and previous moves higher in US Treasury yields led to them becoming the main mover of the USDJPY, as the Bank of Japan (BoJ) committed to applying pressure to yield curve control (YCC) while the Fed signaled over a few meetings they were going to allow their markets to run hot for a while.

The BoJ rates are at a lower bound of -0.10% with their YCC policy targeting a 10Y JGB yield of 0.0%. The Japanese central bank was the first to bring quantitative easing into the zeitgeist over 20 years ago. They continue to expand purchases of short-term JGBs to avoid flattening the JGB curve and support their economy during the covid-19 pandemic, which they find is still causing extreme disruptions.

The main focus this week for traders will be the FOMC meeting on Wednesday, with Fed Chair Powell delivering statements and answering questions in the press conference afterward. No doubt there will be questions about when the Fed is going to start talking about raising interest rates, but no one currently expects any change in monetary policy.

Forward guidance has been promised well in advance, so when the Fed has enough data, they have said they will let us know in good time, there is a possibility the timing of the first-rate hike could be brought forward into 2023. Fed officials have already signaled that they could start to discuss options for tapering QE later this year as early as at the upcoming FOMC meeting. The BoJ is expected to leave its policy settings unchanged.

Over the past year, the USD has tended to strengthen initially following FOMC meetings. The main exception was in January when the USD weakened sharply. While US Treasury yields are dropping the Japanese yen could strengthen, but the macroeconomics in Japan will keep the moves modest, especially during the pandemic restrictions.

On the daily chart, the USDJPY is continuing to travel higher over the long term with momentum reflected in the 20, 50, and 200 daily exponential moving averages pointing higher but at a less acute angle. The Weekly chart shows that the 20 has now crossed the 200-period moving average, but the 50 still has some way to form that higher time frame golden cross.

In terms of price action, last week dipped below the previous week's range but retraced 50% of the move to close green, and 109.00 would seem to be the level of support that traders will be looking for on any subsequent dips. Overall, the price action is stair-stepping higher, it’s just that when it overshoots to the upside the correction appears to be more drawn out.

111.10 would be a good upside target for the bulls and while we are moving in this tight trending channel, the likelihood of sweeping the current 2021 highs is very probable. This means if we were to fall out of this channel the next highest probability trade would be to the downside to test the 108.00-108.50 level and the weekly 20 ema, if not lower as the bears in the supply zone between 109.70-110.60 would have just proven too much for the current bulls and we’ll need some new positions from an area of value to get involved.

The ActivTrades sentiment indicator shows that 59% of the traders on the platform are increasingly becoming more bearish of the currency pair. As this moves into the extreme we could get a move higher, though and pairing of their positions and we could fall into a sideways range for longer.

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