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US Dollar Forecast: DXY Index, USD/JPY Wait on Jackson Hole

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US Dollar Outlook:

  • The US Dollar (via the DXY Index) is hovering just below its yearly highs while USD/JPY rates have broken the downtrend from the July swing highs.
  • Fed Chair Jerome Powell’s Jackson Hole speech will likely catalyze a more significant move in the major USD-pairs.
  • The IG Client Sentiment Index suggests that USD/JPY has a mixed bias in the near-term.

Waiting on Powell’s Speech

The past 48-hours have been rather uneventful in FX markets. Thin summer liquidity is to blame, as traders are unwilling to stake out significant positions ahead of Fed Chair Jerome Powell’s speech at the Jackson Hole Economic Policy Symposium on Friday.

While the chorus of Fed policymakers has been rather hawkish in recent weeks, there is still the outside chance that Fed Chair Powell takes a similar tone to his remarks made at the July FOMC meeting, which inspired market participants to believe that we’ve moved beyond peak Fed rate hike odds amidst a slowing US economy.

That said, with Fed rate hike odds for the September FOMC meeting sitting right at 50% for a 75-bps rate hike, Fed Chair Powell’s speech is likely to spark a significant move across all asset classes. What will Fed Chair Powell likely say?

(1) the US economy is not in a recession;

(2) if the US economy is in a recession, it won’t stop the Fed from raising rates further to fight inflation; and

(3) the outcome of the September FOMC meeting – either a 50-bps or 75-bps rate hike – will be contingent upon how US data evolves over the coming weeks.

If Fed Chair Powell speaks in similar tones to other Fed policymakers over recent weeks, it might help curb the ‘Fed pivot’ narrative that’s evolved since the July FOMC meeting, but it certainly won’t be a hawkish “whatever it takes” moment that echoes the mindset of former Fed Chair Paul Volcker. The shakeout in price action may mean volatility, but no discernible new directional bias in the major USD-pairs.

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

US Dollar Forecast: DXY Index, USD/JPY Wait on Jackson Hole

The DXY Index rallied back towards its yearly highs this week before pausing. Consolidating into an ascending triangle, the dollar gauge retains its potential for a bullish breakout to fresh yearly highs. The momentum structure remains bullish, with the DXY Index above its daily 5-, 8-, 13-, and 21-EMA envelope, which remains in bullish sequential order. Daily MACD is trending higher above its signal line, while daily Slow Stochastics are holding in overbought territory. A weekly close above 109.29 would suggest that the consolidation has ended, yielding to the next leg higher.

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

US Dollar Forecast: DXY Index, USD/JPY Wait on Jackson Hole

After rallying through the July swing highs, USD/JPY rates have paused the past few days, clinging to the trendline as if it indicate that traders are uncertain about whether or not there’s a good reason to either breakout or breakdown again. A push higher from here would bring the yearly high at 139.39 into focus, while a drop below the July swing highs would shift attention back to the ascending trendline from the March and August swing lows closer to 133.00 by the end of the month.

IG Client Sentiment Index: USD/JPY RATE Forecast (August 25, 2022) (Chart 3)

US Dollar Forecast: DXY Index, USD/JPY Wait on Jackson Hole

USD/JPY: Retail trader data shows 27.66% of traders are net-long with the ratio of traders short to long at 2.62 to 1. The number of traders net-long is 4.98% higher than yesterday and 5.22% lower from last week, while the number of traders net-short is 1.10% lower than yesterday and 16.67% 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.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed USD/JPY trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist