US Dollar Forecast: DXY Index Consolidation Continues as USD/JPY Breaks Above 150

US Dollar Outlook:

• US Treasury yields continue to push higher, cushioning the US Dollar (via the DXY Index) from a more significant pullback.
• USD/JPY rates have reached a fresh yearly high, helping the DXY Index remain in its symmetrical triangle.
• The IG Client Sentiment Index suggests that USD/JPY rates have a bullish bias in the near-term.

Biding Time

The US Dollar (via the DXY Index) has not made much progress one way or the other in recent days, as chaotic political developments from across the pond have translated into some relief for the British Pound. The resignation of UK Prime Minister Liz Truss has alleviated a great deal of pressure in financial markets now that her ill-fated fiscal plans are officially dead, and unlikely to be revived anytime soon. Gains in GBP/USD rates have translated into gains in risk appetite more broadly in FX markets, with EUR/USD rates rising as well.

But the DXY Index has not traded all that lower, in part bolstered by the further rise in USD/JPY rates, which have tagged a fresh yearly high and their highest level since August 1990. Rising US Treasury yields, with the short-end of the curve at their highest levels of 2022, are cushioning the DXY Index from a deeper setback.

DXY PRICE INDEX TECHNICAL ANALYSIS: DailyTimeframe (October 2021 to October 2022) (CHART 1)

Last week it was noted that “the DXY Index is funneling into a symmetrical triangle, which given the preceding uptrend, would ultimately suggest a continuation effort higher.” Since then, consolidation has continued, with the symmetrical triangle persisting. Trading is a function of price and time, and the triangle’s termination comes on October 31 – setting up a potential breakout opportunity (up or down) by the first week of November. Triangle support comes in closer to 111.90 over the coming sessions, while a break above last week’s high of 113.92 would suggest a bullish breakout has commenced.

USD/JPY RATE TECHNICAL ANALYSIS: DAILY TIMEFRAME (October 2021 to October 2022) (CHART 2)

USD/JPY rates have pushed above 150.00, hitting a fresh yearly high and the highest level since August 1990. The commentary has not changed over the past week. “The technical structure remains bullish…USD/JPY rates are above their daily EMA envelope, which remains in bullish sequential order. Daily MACD is rising again while above its signal line, and daily Slow Stochastics are holding in overbought territory.

“It’s worth noting that USD/JPY rates have traded above levels at which the Japanese Ministry of Finance has previously intervened to support the Japanese Yen. It remains the case, however, that as long as the policy gap between the Bank of Japan and Federal Reserve remains, it will be difficult for USD/JPY rates to pullback meaningful.”

IG Client Sentiment Index: USD/JPY RATE Forecast (October 20, 2022) (Chart 3)

USD/JPY: Retail trader data shows 17.04% of traders are net-long with the ratio of traders short to long at 4.87 to 1. The number of traders net-long is 1.25% lower than yesterday and 18.45% higher from last week, while the number of traders net-short is 10.99% higher than yesterday and 26.98% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/JPY prices may continue to rise.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/JPY-bullish contrarian trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist