Are Short USDJPY traders trapped?

Market Brief

The economic calendar has only a smattering of data points, all of which amount to very few market-moving data points in usual market conditions. Market participants are slightly discombobulated about what is the true direction of travel. Just when it looks super-bearish, we have a full day of reversal. Only to see that reverse on us again. Overnight the currency markets traded within rather tight ranges and with the lack of data today, that is where we may remain. With that said, it is the 3^rd Friday of the month, so we have to be wary of volatility around the options expiries today.

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Despite yesterday’s negative close on Wall Street, Asia-Pac equity markets and now European bourses are higher this morning. The sentiment was boosted by a reduction in Chinese rates which is a move that is aimed at supporting their property sector. Meanwhile, the Japanese Core CPI came in at 2.1%, above market expectations and the Bank of Japan’s target, though we can assume they will keep with the loose monetary mandate for the foreseeable future. The FTSE chart shows that we had a buy signal last week and even though we had a significant pull back, the daily 200-period ema has acted as decent support. We are still long and will be aiming for the previous swing highs.

Consumer confidence dropped 2 points in the UK GfK survey, falling to a record low of -40, lower than the Covid19 pandemic and the GFC. This morning UK retail sales came in a lot higher than was expected which is being attributed to consumers paying the higher prices for the same amount of goods that they would usually buy. Inflation, rate hikes etc. keep pushing the average person’s spending higher.

Today is Day 3 of the G7 meetings, so we may get some headlines out of that meeting, and we also had what may be the last of the central bankers talking this week. UK MPC Chief Economist Pill talked up how inflation is the largest challenge they have faced over the past 25 years. And that we should expect double digits soon.

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GBPUSD is looking likely to breakout of this 3-day consolidation, to the upside. My target remains the highs from the FOMC and BoE rate hikes earlier in May. The ActivTrader sentiment indicator shows that 61% of traders on the platform are also bullish. If that number continues to increase, I’ll be expecting a more meaningful reversal lower, once we have grabbed the liquidity, and to continue the higher time frame trend.

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If you got short yesterday in the USDJPY, how do you feel now? Trapped? Possibly. Last Thursday’s range had encapsulated a week’s worth of trading action as the USDJPY travelled sideways. The breakout yesterday would have been tempting to take, even though it is counter trend to the overall direction in momentum and monetary policy. The ActivTrader sentiment indicator shows that 75% of traders are shorting this pair, which to me is a clear signal that I should be looking for reasons to get long. Yesterdays close was outside of the lower Bollinger band, so if we get a close in the coming days above the 9-period moving average, I’ll set an order then.

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The drop in the US dollar has boosted precious metals. Silver had broken through a level of support last week. This week’s price action remains inside that previous range but that has been enough for the retail space to believe this is a buy opportunity. The ActivTrader sentiment is at 90% bullish, so I am looking for a shorting opportunity. That could be in the middle of the range at $24/oz. Or possibly as high as the daily low from 10^th of April 2022. I would usually say a liquidity grab from a double bottom is a great opportunity to trap shorts, but this still has a lot of imbalances to cut through. The exponential rise in 2020 from the lows must be back filled imho, so I would be targeting $18/oz if we do get an opportunity to get short.