USD/JPY Trend Forecast: Clearing the June trading range, RSI brewing into overbought

USD/JPY managed to clear its June trading range even as U.S. Treasury yields retreated from their monthly highs, and developments in the RSI indicator (relative strength indicator) suggest that USD/JPY is poised for further gains as the indicator is brewing Entering overbought territory.

If the RSI breaks the 70 level, it could be accompanied by further appreciation in USD/JPY, as seen in previous months. If the latest CPI (Consumer Price Index) data in the United States records another upward performance, then this may trigger the dollar to rise. The annual rate of the US CPI in June is expected to rise further to 8.8% from 8.6% recorded in May.

However, a slowdown in core CPI growth could derail recent gains in USD/JPY, as it could encourage the Fed to slow the pace of normalizing monetary policy. The Fed has shown great willingness to implement stricter monetary policy, but it remains to be seen whether it will continue to raise interest rates by 75 basis points in its July resolution.

Until then, USD/JPY is expected to continue to appreciate amid divergences in the FOMC (Federal Open Market Committee) and BOJ (Bank of Japan) policy paths. However, the trend in retail sentiment looks set to persist, as retail investors have been net short USD/JPY for most of 2022.

The IG Client Sentiment Indicator (Retail Positioning Report) shows that 27.15% of retail investors are net long USD/JPY, with a ratio of shorts to longs at 2.68:1.

Net long positions increased by 7.46% compared with yesterday and decreased by 3.43% compared with last week; while net short positions increased by 1.99% compared with yesterday and increased by 2.60% compared with last week. The reduction in net-long positions coincided with a refresh of the yearly high of 137.75 in USD/JPY, while the increase in net-short positions sparked crowding behavior, as net-long positions in USD/JPY stood at 27.52% in the final days of June.

That said, if the Fed announces a rate hike later this month, USD/JPY could continue to track the upward slope of the 50-day SMA (simple moving average, 132.25) and could see a further test of the September 1998 highs possible 139.91 as it managed to clear the June trading range.

USD/JPY managed to clear its June trading range as the pair rose and refreshed its yearly high of 137.75. The recent rally has pushed the RSI indicator towards overbought territory.

If the RSI indicator rises above the 70 level, then it may be accompanied by further appreciation in USD/JPY, as seen in previous months. If it breaks/closes above the range of 137.40-137.80, it is expected to test the September 1998 high of 139.91.

The next level of interest on a break is 140.30 (78.6% Fibonacci extension), followed by 141.70 (161.8% Fibonacci extension). But a lack of strength to break/close above the 137.40-137.80 range could lead to a range-bound move, especially if the RSI holds steady below the 70 level.