In recent weeks, the USD/JPY pair has shown signs of potential recovery after a significant decline that erased all year-to-date gains prior to the Federal Open Market Committee (FOMC) meeting. Despite a near -14% drop from July’s highs, the bullish sentiment appears to be reemerging, driven by technical indicators and market positioning.
Technical Overview
Earlier this month, I highlighted that the downward movement of USD/JPY might be overextended. Following the FOMC’s decision to cut rates by 50 basis points, the expected bearish reaction did not materialize. Instead, the formation of a bullish engulfing candle suggests a possible countertrend move.
Currently, USD/JPY prices are trading within the upper quarter of last week’s bullish engulfing candle. This positioning indicates increasing demand for the pair, which many traders might view as oversold. The key question for market participants now is how much of a rebound can be anticipated. Corrections are a natural part of any downtrend, and this scenario appears to be unfolding.
Futures Market Positioning
According to the Commitment of Traders (COT) report for CME futures, both large speculators and asset managers maintained net-long positions on JPY futures, reaching their highest levels since 2021 last week. While this bullish exposure is not extreme by historical standards, it suggests a heightened sentiment recently.
However, there has been a notable de-risking trend among traders, as both gross longs and shorts have been trimmed. What stands out in the current analysis is the significant plunge in overall open interest (OI). While the exact reasons for this decline are unclear, the context surrounding it is critical. An extended upward move in yen futures (indicating a lower USD/JPY) alongside this drop in OI could suggest a sentiment extreme, marking a potential inflection point for the market.
Key Drivers for Price Movement
For the USD/JPY pair to continue its rally, U.S. economic data must outperform expectations while the Bank of Japan (BOJ) fails to meet hawkish market anticipations. Although neither scenario is far-fetched, traders must remain cautious, as the prices are currently at a significant inflection point.
Technical Analysis
From a technical perspective, the USD/JPY has rebounded approximately 5% since the early September lows. However, a daily close above the 144 handle has not yet been achieved, and the recent shooting star pattern respected the prevailing trend resistance.
Assuming last week’s bullish engulfing week holds significance, the market may be preparing for a pullback within last week’s trading range before advancing further. A moderate retracement is anticipated, with critical support levels identified at the August high of 141.66 and the low of Friday’s bullish outside day.
Bulls may look to enter positions above these support levels, while bears might look for opportunities on lower timeframes. Notably, a bullish engulfing candle has formed on the 4-hour chart around the 50-bar Exponential Moving Average (EMA), indicating a potential swing low on this timeframe.
Conclusion
The current market environment for USD/JPY indicates a possible shift in sentiment, with bullish signals emerging after a significant downturn. Traders should monitor key support levels and economic data releases closely, as these factors will play crucial roles in determining the pair’s next direction. With open interest plunging and positioning shifts occurring in the futures market, the upcoming trading sessions may reveal important developments for USD/JPY.
