Forex Analysis
This week’s main event was the US CPI and now market participants are piecing together all the economic evidence together to try and work out what the Fed may do next and also what to expect for the rest of the year. The consensus is that inflation is not going to come down fast, but we may have just witnessed ‘peak inflation’. There is very little in the way of stimulus being prepared for and monetary policy is pivoted towards removing any spare capacity to reduce demand.
A lot of focus is now on the US 2 Year note yield as this is the yield that the Fed can affect the most. The bond market moves the fixed income yields from the benchmark out to the 30-year. Since December 2021 they have been indicating that they don’t believe that the Fed with its rate hikes will create long term prosperity and we have seen the yield curve flatten and in some areas invert.
The Federal Funds Effective Rate lags the US 2-year yield, so from the above chart we can assume that the Fed will move its bank rates higher over the course of the next 3 meetings. Fed Chair Powell and other FOMC members said this will be at 50bps at a time.
Following the latest CPI data from the USA, Germany and UK the benchmark yields have come off their highs as the market either decides they don’t believe there is much room for rate hikes and that they have priced in the moves already, or that the economic landscape is showing a problem ahead and that a move back into the risk-free safe haven of a government bond would be the best bet for now.
Since 2020 and the pandemic sell-off in all assets the USDJPY and US 2-year yield have had a relatively close relationship. Recently though, as can be seen in the chart above they have started to move in lockstep. The dip in the 2-year yield has also translated in a sell-off in the USDJPY. The question is whether the USDJPY is now going to move lower?
See real-time quotes provided by our partner.
The bearish scenario is that as yields drop the yen does better and on a USDJPY chart that would look something like a double top forming as we have seen recently, a break lower and then for that old support to act as resistance. This will be the place to take a short trade. However, price action is still above the 200-period moving average, so we could compress around these levels for a while and create a larger distribution pattern.
I personally find it hard to get short in any meaningful way when the majority of retail traders are also thinking the same thing. The ActivTrader sentiment indicator shows that 75% of traders are currently trading as though this is a topping pattern. I would like therefore to see this cohort have their stops removed above that double top and then for the USDJPY to either continue in its uptrend towards 135, possibly 150. Or for the sentiment to shift to neutral, possibly bullish as they get stopped out and then for the collapse in the US dollar as yields drop and the yen goes higher.
A comprehensive website for traders, both experienced and new! Checkout our content and learn how to invest and speculate in the markets using margin traded products. Our team of educators has extensive experience and is here to help. Enjoy!
© 2020 YouTrading UK - Leaders in Trader Training.
Cookie | Duration | Description |
---|---|---|
__cfduid | 1 month | The cookie is used by cdn services like CloudFare to identify individual clients behind a shared IP address and apply security settings on a per-client basis. It does not correspond to any user ID in the web application and does not store any personally identifiable information. |
_wpfuuid | 11 years | This cookie is used by the WPForms WordPress plugin. The cookie is used to allows the paid version of the plugin to connect entries by the same user and is used for some additional features like the Form Abandonment addon. |
cf_use_ob | This cookie is set by the provider Cloudflare content delivery network. This cookie is used for determining whether it should continue serving "Always Online" until the cookie expires. | |
cookielawinfo-checbox-analytics | 11 months | This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics". |
cookielawinfo-checbox-functional | 11 months | The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional". |
cookielawinfo-checbox-others | 11 months | This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other. |
cookielawinfo-checkbox-advertisement | 1 year | The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Advertisement". |
cookielawinfo-checkbox-necessary | 11 months | This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary". |
cookielawinfo-checkbox-performance | 11 months | This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance". |
viewed_cookie_policy | 11 months | The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data. |
Cookie | Duration | Description |
---|---|---|
YSC | session | This cookies is set by Youtube and is used to track the views of embedded videos. |
Cookie | Duration | Description |
---|---|---|
_ga | 2 years | This cookie is installed by Google Analytics. The cookie is used to calculate visitor, session, campaign data and keep track of site usage for the site's analytics report. The cookies store information anonymously and assign a randomly generated number to identify unique visitors. |
_gid | 1 day | This cookie is installed by Google Analytics. The cookie is used to store information of how visitors use a website and helps in creating an analytics report of how the website is doing. The data collected including the number visitors, the source where they have come from, and the pages visted in an anonymous form. |
Cookie | Duration | Description |
---|---|---|
_fbp | 3 months | This cookie is set by Facebook to deliver advertisement when they are on Facebook or a digital platform powered by Facebook advertising after visiting this website. |
fr | 3 months | The cookie is set by Facebook to show relevant advertisments to the users and measure and improve the advertisements. The cookie also tracks the behavior of the user across the web on sites that have Facebook pixel or Facebook social plugin. |
IDE | 1 year 24 days | Used by Google DoubleClick and stores information about how the user uses the website and any other advertisement before visiting the website. This is used to present users with ads that are relevant to them according to the user profile. |
test_cookie | 15 minutes | This cookie is set by doubleclick.net. The purpose of the cookie is to determine if the user's browser supports cookies. |
VISITOR_INFO1_LIVE | 5 months 27 days | This cookie is set by Youtube. Used to track the information of the embedded YouTube videos on a website. |
Cookie | Duration | Description |
---|---|---|
_gat_UA-42160853-2 | 1 minute | No description |
cf_ob_info | No description | |
CONSENT | 16 years 8 months 3 days 6 hours 2 minutes | No description |