Risk sentiment improves. USD/JPY trading fluctuates, "short trap" strengthens the upward trend

On Thursday (October 7), the US dollar against the yen fluctuated within a narrow range, fluctuating between slight rises and slight declines, and is currently trading at around 111.30.


A series of factors helped USD/JPY gain some positive traction in the first half of Thursday, despite the lack of further bullish momentum. The risky urge in the market weakened the safe-haven yen. After the Bank of Japan lowered its assessment of 5 of Japan’s 9 regional economies, the yen was under further pressure.

On Wednesday, after Russian leaders assured Europe of natural gas supplies, global risk sentiment took a dramatic turn. In addition, the US Senate Republican leader McConnell said that the party will allow the federal debt ceiling to be extended to December to avoid a federal debt default. This has further stimulated investors' interest in high-risk assets such as stocks.

But the weaker dollar tone inhibited any meaningful upside of the dollar against the yen. Due to the market expectation that the Fed will tighten its policy early and the recent widening of the US-Japan Treasury bond yield gap, the downward momentum of the exchange rate has still been cushioned.

Since the Fed hinted at the end of September that it would start reducing the scale of monthly bond purchases by the end of 2021, US bond yields have been rising. Fearing that soaring energy prices will trigger inflation, the market seems to have begun to digest the possibility of the Fed raising interest rates in 2022. This will boost the U.S. dollar and the U.S. dollar against the yen.

The fundamental background seems to be favorable to the bulls and supports the prospect of continuation of the recent appreciation trend of the past three weeks or so. However, investors seem to be reluctant to bet heavily, preferring to wait and see before the closely watched US Monthly Employment Report (NFP) is released on Friday.

At the same time, traders may get clues from the weekly unemployment claims data released by the United States on Thursday, which will be released in the North American market in early trading. In addition, US bond yields and broader market risk sentiment will affect the dollar against the yen and allow traders to seize some meaningful opportunities.

From a technical point of view, the “short trap” under the 38.2% retracement level of 110.95 for USD/JPY has strengthened the overall upward trend. There is room for the exchange rate to rise to 112.08, 112.23, and 112.40. These three levels are 2021. , 2020 and 2019 highs.

If it goes down, 110.95, 110.60 and 110.25 are all expected to provide support.

(Daily chart of USD/JPY)

At GMT+8 16:38, the USD/JPY traded at 111.37.