USD/JPY Stages Another Attempt to Break Out of 2022 Opening Range

Japanese Yen Talking Points

USD/JPY clears the monthly opening range as it extends the series of higher highs and lows from earlier this week, but the exchange rate may consolidate ahead of the Federal Reserve interest rate decision on March 16 if it fails to take out the February high (116.34).

USD/JPY Stages Another Attempt to Break Out of 2022 Opening Range

USD/JPY appears to be tracking the recent rise in longer-dated US Treasury yields as it trades to a fresh monthly high (116.20), and the exchange rate may stage another attempt to break out of the opening range for 2022 as Federal Open Market Committee (FOMC) is widely expected to deliver a 25bp rate hike.

At the same time, the update to the Summary of Economic Projections (SEP) may reflect an adjustment in the FOMC’s exit strategy if Chairman Jerome Powell and Co. forecast a steeper path for the Fed Funds rate, and speculation for a series of rate-hikes in 2022 may generate a bullish reaction in USD/JPY as the FOMC implements higher interest rates well ahead of the Bank of Japan (BoJ).

As a result, it may turn out to be just a matter of time before USD/JPY breaks out of the opening range for 2022, and a further advance in the exchange rate may continue to coincide with the crowding behavior seen late last year as the gauge for retail sentiment approaches the extreme readings from earlier this year.

The IG Client Sentiment report shows only 26.48% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 2.78 to 1.

The number of traders net-long is 11.50% lower than yesterday and 24.16% lower from last week, while the number of traders net-short is 3.38% higher than yesterday and 5.10% higher from last week. The decline net-long position comes as USD/JPY extends the series of higher highs and lows from earlier this week, while the rise in net-short interest has fueled the tilt in retail sentiment as 39.04% of traders were net-long the pair last week.

With that said, USD/JPY may stage another attempt to break out of the opening range for 2022 as it trades to a fresh monthly high (116.20), but the exchange rate may consolidate ahead of the Fed rate decision if it fails to take out the February high (116.34).

USD/JPY Rate Daily Chart

Source: Trading View

• Keep in mind, the broader outlook for USD/JPY remains constructive as the 200-Day SMA (112.54) preserves the positive slope carried over from last year, with the advance from the January low (113.47) negating the threat for a head-and-shoulders formation as it tracks the opening range for 2022.
• USD/JPY appears to be stuck in a defined range amid the lack of momentum to clear the January high (116.35), but the exchange rate may stage further attempts to break out of the opening range for 2022 following the failed attempts to test the February low (114.15).
• USD/JPY appears to have reversed ahead of the Fibonacci overlap around 113.80 (23.6% expansion) to 114.30 (23.6% retracement), with the move above the 115.90 (100% expansion) to 116.10 (78.6% expansion) region raising the scope for a break of the yearly opening range.
• A move above the January high (113.35) brings the 117.60 (23.6% retracement) to 117.90 (23.6% retracement) area on the radar, with a break above the 2017 high (118.61) opening up the 118.70 (50% expansion) region.
• However, failure to clear the February high (116.34) may push USD/JPY back below the 115.90 (100% expansion) to 116.10 (78.6% expansion) region toward the overlap around 113.80 (23.6% expansion) to 114.30 (23.6% retracement).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong