USD/JPY Forecast: Bollinger Bands tighten as US tariffs loom

• Bollinger Bands (standard deviation of +2,-2 on 20-day moving average) are narrowest since early October, signal a strong move is likely to happen soon, possibly on the downside on escalating trade war.
• The US is set to fire the first shot in the trade war with China at 0401 GMT today. Beijing has vowed to fight back in kind.

The USD/JPY pair could be in for a sharp sell-off, courtesy of a trade war between the world’s two largest economies.

The US is set to impose 25 percent tariffs on $34 billion of Chinese imports at 0401 GMT today and Beijing is more than ready to retaliate in kind. Further, US President Donald Trump has threatened to impose tariffs on as much as $450 billion worth of Chinese goods if Beijing announces retaliatory tariffs.

Clearly,  a full-fledged trade war between the US and China is close to becoming a reality.

At press time, the currency pair is trading at 110.67 - up 0.10 percent on the day, having defended the 20-day MA in the last 48 hours.

The relative calm in the USD/JPY market creates an impression that investors have embraced US-China trade war, however, investors are likely running away from reality - trade wars are here - and are expecting China and US to reach some kind of last minute deal.

So far, we have not heard of any such developments. Hence, the anti-risk Japanese Yen will likely pick up a bid after the US-China trade war becomes reality at 0401 GMT.

The price chart analysis suggests the pair could see a big move soon, possibly on the downside.

Daily chart

The above chart shows the gap between the Bollinger Bands is smallest since October, indicating a big move is likely to occur soon.

Narrowing Bollinger Bands represent falling volatility and an extended period of low volatility is often followed by a violent breakout/breakdown.

That said, the probability of a big sell-off is high as indicated by Tuesday’s bearish outside-day candle (bearish pattern). Further, the outlook remains bearish while the pair is trading below 111.40 (high of the bearish outside-week candle created in May)

The sell-off would gather pace once the USD bears beat the support of the rising trendline (drawn from March low), currently located at 110.22.

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• The USD/JPY risks falling below the rising trendline support of 110.22 on US-China trade war and could extend the decline towards 109.37 (June 26 low).
• The US non-farm payrolls and wage growth release could be overshadowed by the US-China trade war.
• Technically speaking, a weekly close above 111.67 (three-year long falling trendline as per log - scaled chart) would confirm a bearish-to-bullish trend change.