US Dollar Forecast: USD/JPY Faces Challenges After Failing to Retest April High
Original article by David Cottle, Forex.com
The US Dollar has recently experienced turbulence against the Japanese Yen, failing to reclaim its April 2024 highs and stalling below key resistance levels. This development signals a potential period of consolidation or even weakness for the USD/JPY pair in the short term, as traders reassess the outlook for both currencies amid diverging monetary policies and global economic uncertainties.
Overview
The USD/JPY pair has been one of the key barometers for market sentiment regarding US monetary policy and global risk appetite. After surging earlier this year and approaching 34-year highs in late April, the currency pair lost momentum by early May, with buyers reluctant to push it through the critical resistance level around 160.00. Instead, the pair hovered below the April peak as doubts resurfaced about the Federal Reserve’s future policy direction and Japan’s own efforts to arrest Yen weakness.
Failure to Retest April High
– The April high of 160.17 marked a 34-year peak in the USD/JPY pair, driven by a strong US Dollar and a persistently weak Japanese Yen.
– However, after a sharp rally that started in early 2024, the pair failed to maintain upward momentum in May, stalling around the 157.50 to 159.00 zone.
– This hesitation suggests market participants may be waiting for further confirmation about the Federal Reserve’s plans before committing to further Dollar buying.
Contributing Factors
Several fundamental and technical elements have played a role in capping the upside of the USD/JPY pair.
Federal Reserve Policy Outlook
– The Federal Reserve’s policy direction heavily influences the USD/JPY exchange rate.
– Though US inflation data has remained relatively sticky, recent signals from the Federal Reserve suggest there is caution regarding rate increases.
– While some parts of the market were pricing in potential further tightening at the start of the year, recent statements from Fed officials have leaned more toward a “wait-and-see” approach.
– As a result, bond yields have come off their highs, lessening the appeal of the US Dollar relative to the Yen.
Bank of Japan Intervention Fears
– The Bank of Japan (BoJ), which maintains one of the loosest monetary policies among major central banks, has faced pressure to address the rapid depreciation of the Yen.
– Japanese authorities have been vocal about the potential for intervention in the currency markets, especially if the Yen continues to weaken past key psychological levels.
– Even though Japan conducted some foreign exchange interventions in late April and early May, their long-term effectiveness remains uncertain.
– Nevertheless, the possibility of further intervention works as a ceiling for the USD/JPY pair, discouraging traders from aggressively pushing above record highs.
Technical Analysis
– From a technical perspective, the USD/JPY’s inability to move above 160.00 could imply short-term consolidation or a corrective phase.
– The uptrend that began in early 2024 remains intact on longer-term charts; however, momentum indicators show signs of fatigue.
– The Relative Strength Index (RSI) moved into overbought territory during the April rally, and has since moderated, suggesting a short-term pullback may be underway.
– Immediate support lies around 155.50, while strong support holds at 153.00, where a Fibonacci retracement level and previous breakout zone converge.
– On the upside, only a break and close above 160.17 would rejuvenate bullish momentum and potentially open the door to new multi-decade highs.
Market Sentiment and Traders’ Positioning
Retail trader positioning reveals a mixed sentiment toward the USD/JPY pair.
– According to IG Client Sentiment data, a majority of retail traders have been net short on USD/JPY, suggesting many expect a reversal from current levels.
– Historically, retail traders tend to be wrong at key turning points, potentially indicating that further
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