USDJPY Outlook Receives Bullish Charge on Break Higher

The US Dollar managed a meaningful bullish break via the trade-weighted DXY Dollar Index. The upper bound on the three-month channel that measure was pressuring is fairly distinct, but the same decisive structure isn‘t present on all the Dollar-based majors. In fact, EURUSD’s range floor above 1.0650 is conspicuously holding up the market while GBPUSD couldn‘t clear its own trendline support (back to November 11th) despite the added charge of bearish UK event risk. It is important to consider that context when evaluating USDJPY’s own progress above 133.00 That level, which was breached this past session, represents range resistance stretching back five weeks and the 38.2 percent Fibonacci of the (January) 2021 to 2022 (October) bull trend. By most accounts, this is a ‘clean’ technical move; but where will the inspiration for follow through come？ That is my principal concern for this pair.

When it comes to the most productive winds over the past months and years for USDJPY, there have been two factors that have been most representative in dictating market movement: monetary policy and risk trends. Sentiment was generally uneven across the capital markets this past session with some measures like the UK-based FTSE 100 pushing to a new record high, but the S&P 500 failed to resolve an extremely restrictive range – a pattern that would otherwise look ripe for a break. One of the more remarkable correlations for gauging USDJPY‘s connection to risk trends would be the VIX volatility index. The ’fear index actually dropped a fourth straight day by -0.7 points to close in on the one-year low all while the currency pair sailed above 134. Perhaps this is a carryover of the swell in yield differentials favoring the US forecast in the aftermath of the CPI update. That could be the case, but such an emergent technical move would benefit a more reliable fundamental momentum – especially when the Dollar is still hung up elsewhere.

Looking to the positioning of retail traders behind USDJPY, the IGCS shows that the preferred range perspective has kicked in despite the technical break. Short positions have maintained their jump this week that has pushed the net exposure to an approximate 60 percent short to 40 percent long ratio. How long will the retail crowd fight the trend？ While we frequently consider retail positioning a contrarian indicator, the proclivities of newer and smaller investors tend to support ranges versus momentum. If this is a false breakout – in other words with no follow through – their default view may actually align to the markets preference.

Looking to the economic docket to find motivation and clarity from the scheduled data releases, there isn‘t much in the way of uniquely capable event risk that can trigger a systemic ’risk response or redefine monetary policy bearings. From the Japanese side of the equation, I would keep an eye on any unannounced updates from the Bank of Japan, particularly in regards to the new incoming Governor, as there is growing speculation over his intentions for the path moving forward. US event risk is more capable, but housing activity, upstream inflation and a leading index (from Conference Board) is not the kind of sparks that have historically set true blazes. If anything, the Fed speak we have on tap could be meaningful should their views turn even more hawkish following the announcement of the US CPI.