A Basic Guide To Forex Trading

   US DOLLAR OUTLOOK

• The dollar (via DXY) pared gains following the release of the July FOMC minutes.
• It is difficult to determine the directional bias of the DXY index and the USD/JPY exchange rate as momentum indicators provide conflicting views.
• The IG Client Sentiment Index suggests that USD/JPY is bullish in the near term.

The much-anticipated release of the July FOMC minutes turned out to be a bit of a disappointment - at least for the dollar (via DXY). There were no hawkish surprises in the minutes of the meeting with one sentence that stood out: "The participants believed that Monetary policy tightens further and a slower pace of policy rate hikes may become appropriate when assessing the impact of cumulative policy adjustments on economic activity and inflation. 

Recent data points suggest that the Fed's recent policy changes have indeed had the expected impact on aggregate demand and inflation: the U.S economy's growth trajectory has slowed; the U.S July inflation report showed a monthly reading of 0%.

The knock-on effect of the July FOMC minutes was a slightly lower rate forecast for the September Fed meeting. The odds of a 75 basis point rate hike fell from 51% yesterday to 46% today a sign that market participants are taking the Fed's latest news as confirmation. We all know: The pace of rate hikes will slow in the coming months.

USD/JPY Exchange Rate Technical Analysis: Daily Time Frame (August 2021-August 2022)

The USD/JPY pair has rebounded recently from above the downtrend line of the July high (annual high) and early August swing high which is problematic as traders sold the pair after July ( With U.S Treasury yields softening) FOMC minutes. A break below the downtrend line could trigger Back to the August low of 130.91 that was avoided last week. Just like the broader DXY Momentum indicator provides conflicting signals that it will take more time to determine a directional bias; if Treasury yields end up range-bound in the near term The pullback came at the same time as the U.S stock market rebounded.

USD/JPY: Retail data shows that 33.61% of traders are net-long with a ratio of shorts to longs of 1.98:1 The number of net longs decreased by 8.32% from yesterday and by 2.94% from last week while the number of net short traders increased by 7.16% from yesterday an increase of 21.08% from last week.

We usually take a contrarian view of market sentiment and the fact that traders are net short suggests that USD/JPY prices may continue to rise.

Traders are further net-short than yesterday and last week and the combination of current sentiment and recent changes makes us bullish on USD/JPY with a contrarian trade bias.