USD/JPY Forecast: bounce from 100 DMA not meaning much for bears

• USD/JPY saved from a sharp slide by government bond yields.
• Mild positive sentiment around the pair, USD/JPY needs to break 113.40.

The USD/JPY pair aims to finish the week marginally higher above the 112.00 figure, as despite broad dollar's strength, it was risk aversion which fueled demand for the American currency, something that also spurs demand for the yen.

Resurgent yields lifted the pair from a  weekly low of 111.62, with government bond yields affected by two different factors: US ones gained on Wednesday after the release of the FOMC Meeting's Minutes, which stated that "participants generally anticipated that further gradual increases in the target range for the federal funds rate would most likely be consistent with a sustained economic expansion, strong labor market conditions, and inflation near 2 percent over the medium term." Policymakers even discussed the possibility of hiking rates beyond normalization, to keep inflation under control. The other factor that sent yields higher, particularly in Europe were renewed tensions between the EU and Italy over the budget of this last. On Thursday, Brussels warned Italian minister  Tia that the 2019 budget draft points to a “particularly serious non-compliance with the budgetary policy obligations laid down” in European rules, with a deficit of a roughly 2.9%. Italian government bond yields are skyrocketing with the spread with German counterparts at multi-year highs.

The effect of higher yields in the USD/JPY pair was partially offset by the sour tone of equities, which fell sharply on fears that higher yields will hit production costs and affect EM economies, triggering a crisis that could spread worldwide.

Japan released two relevant macroeconomic figures September Trade Balance and National CPI. The trade balance posted a solid ¥139.6B surplus after 2 months of large deficits. However, exports were down 1.2%, while imports increased by  7.0%, this last, amid strong demand for energy. Annual inflation was up 1.2%, below prior 1.3%, although the core reading, matched the market's forecast by printing 1.0%, up from the previous 0.9%.

The upcoming week will be a busy one, although as usual, Japanese releases will tend to have a limited immediate effect on price. Nevertheless, the country will release the October Nikkei preliminary manufacturing PMI, and Tokyo inflation, this last more relevant than the National one and forecasted at 0.9% ex-fresh food. As for the US, Durable Goods Orders and the first estimate of Q3 GDP, foreseen at 3.3% vs. the previous 4.2%, will take center stage at the end of the week.

Yields and political tensions coming from different fronts will continue to be the main motor for the pair.

USD/JPY technical outlook

The weekly chart for the USD/JPY pair shows that it held at the lower end of the previous week's range and trapped between the 100 and 200 SMA, both lacking directional strength. The Momentum indicator in the mentioned chart offers a bearish slope, pressuring its 100 level, but the RSI aims marginally higher around 57, all of which leaves a neutral stance. In the daily chart, however, technical indicators are in negative ground, with the Momentum heading firmly lower within oversold readings and the RSI directionless around 49, leaning the scale toward the downside. In this last chart, the pair bounced from a key psychological support, the 100 DMA, which now stands at 111.65. A break through this last will open doors for a steeper decline next week, which could extend down to 109.77, August low. In the middle, supports come at 111.00, and 110.50. To the upside, the pair needs first to overcome the 112.80, but above 113.40 the upside will look more constructive.

USD/JPY sentiment poll

The FXStreet Forecast Poll indicates that the sentiment around the USDJ/JPY pair is bearish, seen down in the three time-frames under study a clear change from previous neutral-to-bullish sentiment. Weekly basis, the number of bears is the larger ones, up to 62%, with an average target of 112.01. Bears decrease to 45% in the monthly view, and further to 34% in the quarterly perspective, yet in both cases, the price is seen holding not far below the mentioned 112.00. The Overview chat, however, offers a bullish moving average for next week, with the slopes turning neutral-to-bearish as time goes by. In the 3-month forecast, the spread of possible targets is quite ample, between 106.00 and 118.00, indicating the absence of a clear dominant trend rather than signaling a certain outcome.

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