USD/JPY Forecast: Bears bracing for action in back-to-school-week

What a difference one weekend makes. USD/JPY has rebounded from below 105, and advanced after both the US and China called for calm. Despite the optimism, the upcoming week will likely kick off with new tariffs before top-tier figures impact the US economy. Volatility is set to rise.

This week in USD/JPY: Optimism about trade

US President Donald Trump defused the trade tensions early on Monday by saying that "China called twice" over the weekend. While Beijing said it is unaware of the talks, officials from the world's largest economies called for calm. Low-level talks and optimism about potential high-level talks in Washington – sometime in September – improved the mood and weighed on the safe-haven Japanese yen. 

This calm was much needed after China's announcement of counter-measures against the US and angry tweets by Trump, eventually announcing higher levies in response. Yet while stock markets rose and the yen dropped, bond yields were reluctant to recover. While the benchmark 10-year Treasury yield is off the lows – it fell below the 2-year yield – an inversion. 

This 10-year /2-year inversion has joined the 3-month / 5-year inversion in signaling an upcoming US recession. Mary Daly, President of the San Francisco branch of the Federal Reserve, has noted that concerns about a downturn may become self-fulfilling. 

So far, growth remains solid in the world's largest economy. Gross Domestic Product growth underwent a minor downward revision to 2%. However, the expansion is based on robust consumption – while investment is contracting. These trends were also reflected in other figures – the Conference Board's Consumer Confidence measure jumped to 135.1 points while Durable Goods Orders were mixed.  

Late in the week, the final version of the University of Michigan's Consumer Sentiment was revised down to 98.9 – the lowest since October 2016. The data is worrying and increases the odds of a recession.

US events: Non-Farm Payrolls top a busy week

Barring a dramatic announcement, the US is set to impose a 10% tariff on Chinese imports worth $110 billion on Sunday, September 1. If the administration backs down – due to an agreement with China or not – markets are likely to cheer, and USD/JPY may leap.

Assuming Washington goes forward with the move, Beijing's countermeasures are already ready. The upshot is that the world's second-largest economy may choose to wait – according to hints by the commerce ministry. Any delay may boost the currency pair while implementing the move may send dollar/yen further down.

It is essential to note that US traders will be on holiday on Monday due to the Labor Day weekend – resulting in low liquidity during the American session and perhaps some erratic moves.

As investors return to their desks on Tuesday, they will have new data to consider. ISM's Purchasing Managers' Index for the manufacturing sector is set to remain above 50 – indicating expansion – but only just. The Fed also watches the ISM Prices Paid component for forward-looking indications about inflation.

Thursday is also packed with top-tier figures. ADP's jobs report for the private sector serves as a hint towards the official Non-Farm Payrolls report due out on Friday. A similar increase to July's 156K advance is expected for August. 

The ISM Non-Manufacturing PMI also serves as a gauge toward the jobs report as well as providing a snapshot of the state of the services sector. A moderate increase is projected.

And on Friday, the "king of forex indicators" carries expectations for an increase of 155K in August – mildly below 164K reported in July. Wage growth stood at an annual pace of 3.2% back then, and any change will also be of interest.

The NFP serves as a critical input for the Federal Reserve as it prepares to make its decision on September 18th. 

Last but not least, Jerome Powell, Chair of the Federal Reserve, will speak in a panel in Zurich close to the end of the week. This will be Powell's last chance to convey a message regarding the upcoming decision.

Here are the top US events as they appear on the forex calendar: 

Japan: Moving with bonds

The Japanese yen remains the ultimate safe-haven, topping Gold and the Swiss franc. The correlation with bonds and the inverse correlation with stocks is set to continue.

The yen previously attracted flows when tensions in the Persian Guly and around North Korea intensified. Both issues are currently on the back burner but may flare up at any time. 

The Japanese economic calendar features a few noteworthy figures. Foreign investments and Overal Household Spending – which have been upbeat – may move the yen late in the week.

Here are the events lined up in Japan:

USD/JPY Technical Analysis

Downside momentum on the daily chart is waning, but that is the only good news for USD/JPY. It continues trading below the 50, 100, and 200-day Simple Moving Averages and has been unable to recapture the uptrend support it lost and the downtrend resistance that caps it since mid-July.

All in all, the bears are in control.

Some support awaits at 106.20, which provided support in early August. It is followed by 105.50, which held the pair up in mid-August. It is followed by 105.05, which was a low point later in the month and by 104.75, which was the low point in January. This week's early crash to 104.45 is the next level to watch.

Resistance awaits at 106.75, which capped USD/JPY in late August. Then, it is followed by 107.25 that held USD/JPY up in mid-July. 107.50 provided support in early July, and it is followed by 107.10, and 108.45. 

USD/JPY Sentiment

If the US and China proceed with slapping levies – the only way is down. The optimism that was seen recently seems unjustified. In this case, it would take an extraordinary US jobs report to turn the tables in favor of USD/JPY. 

The FXStreet Poll is pointing to higher levels on all time frames, with the highest optimism in the medium-term – a target in the 107 handle. In comparison to the previous week, forecast have barely changed.

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