USD/JPY Rate Reversal Takes Shape Ahead of 50- Day SMA

TALKING POINTS FOR THE JAPANESE YEN

As it carves a sequence of higher highs and lows ahead of the 50-Day SMA (127.03), the USD/JPY looks to have reversed, and the exchange rate may follow the upward slope in the moving average as it clears last week's range bound price action.

RATE REVERSAL IN THE USD/JPY TAKES FORM AHEAD OF THE 50-DAY SMA

Following an unexpected jump in the US ISM Manufacturing survey, the USD/JPY has risen to a new weekly high (130.19), with the exchange rate gaining over 2.5 percent since the start of the week, as it seems to be tracking the rise in US Treasury rates.

The improvement in the ISM survey should keep the Federal Reserve on track to raise interest rates because it indicates a healthy economy, and Governor Christopher Waller's recent remarks suggest the central bank will shift gears again in 2022, as the permanent voting member of the Federal Open Market Committee (FOMC) favors "tightening policy by another 50 basis points for several meetings."

While speaking at an event hosted by the Institute for Monetary and Financial Stability, Governor Waller expressed his support for keeping "the policy rate at a level above neutral" as the central bank struggles to control inflation, adding that "the strong labor market can handle higher rates without a significant increase in unemployment" (IMFS).

As a result, the upcoming update to the US Non-Farm Payrolls (NFP) report, which is expected to add 325K jobs in May, may fuel speculation for another 50bp rate hike, and it remains to be seen if Chairman Jerome Powell and Co. will forecast a steeper path for the Fed Fund rate at the next interest rate decision on June 15, when the central bank is set to release the updated Summary of Economic Projections (SEP).

Until then, the differing trajectories of the FOMC and the Bank of Japan (BoJ) may keep USD/JPY afloat, but the retail sentiment tilt is certain to endure as traders have been net-short the pair for the most of 2022.

According to the IG Client Sentiment report, 31.51 percent of traders are presently net-long USD/JPY, with a short-to-long ratio of 2.17 to 1.

The number of traders who are net-long is up 0.16 percent from yesterday and up 23.49 percent from last week, while those who are net-short is up 4.70 percent from yesterday and down 4.98 percent from last week. The increase in net-long positions comes as the USD/JPY makes a series of higher highs and lows, while a drop in net-short interest has helped to relieve congestion, with just 26.83 percent of traders net-long the pair last month.

As a result of the increase in US rates, USD/JPY may continue to climb ahead of the NFP data, and the exchange currency may continue to follow the positive slope of the 50-Day SMA (127.19) as it approaches the moving average.