USD/JPY Forecast: Bracing for new lows amid trade wars, Powell's path to rate cuts

  • USD/JPY has been trading in a narrow range amid trade tensions and speculation about Fed policy.
  • Final US GDP, further Fed speculation and end-of-month flows will likely dominate trading.
  • Late August's technical daily chart is painting a mixed picture.
  • Experts foresee a bounce from the lows.

This week in USD/JPY: Trade tensions prevail

President Donald Trump has repeated his stance that he is not ready for a deal with China. However, the administration delayed the ban on American companies trading with Huawei – the Chinese telecom giant that is seen by some as a security threat. 

The world's second-largest economy also repeated its position that it would retaliate if the US were to move forward with its planned tariffs on September 1st. China may limit the activity of some American companies operating in the country.

The Federal Reserve's meeting minutes from its July meeting have shown a delicate balance within the world's most powerful central bank. Most members supported the decision to cut interest rates as a one-off, "insurance cut" – implying a pause later on. Some rejected reducing rates while a couple of members wanted a 50 basis point cut – double the standard 25bp cut that the bank announced back then – on July 31st.

The release had a limited impact due to its balanced nature, its late publication date, and anticipation for Fed Chair Jerome Powell's all-important speech at Jackson Hole.

See Powell powerless against Trump's trade wars – US braces for a recession, USD set to move

The vacation season in the northern hemisphere has contributed to narrower trading ranges.

US events: Trade, GDP revision, and more

Will the US refrain from slapping tariffs on China on September 1st? Trump has already delayed levies on goods worth $160 billion to December 15th, but still intends to push through with duties on around $110 billion – and China has vowed to retaliate. Conversations between both sides are going on, and if some truce is reached – USD/JPY may jump. Currently, the US is set to push through with these tariffs. 

The economic data features significant events throughout the week. Durable Goods Orders for July are released on Monday and economists expect moderate increases in comparison to June. The non-defense ex-aircraft measure tends to have the most significant impact. The Fed watches this investment gauge closely, and the figures shape GDP expectations for the third quarter.

Housing figures and the Conference Board's Consumer Confidence measure are due out on Tuesday. The University of Michigan's consumer sentiment dipped in the preliminary read for August, and a similar slide may also be seen here.

The second release of US Gross Domestic Product is scheduled for Thursday. The world's largest economy outperformed its peers in the second quarter with 2.1% annualized growth. A minor revision is expected. Growth components and the deflator may have an impact as well.

Personal Consumption Expenditure (PCE) is the Fed's preferred measure of inflation and is importance despite lagging the Consumer Price Index (CPI) release. While Core CPI accelerated from 2.1% to 2.2% in July, Core PCE is projected to remain unchanged at 1.6%. The figure feeds into the bank's decision in September. 

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

US macro economic events August 26 30 2019

Japan: Trade and Tokyo inflation

The Japanese yen remains the ultimate safe-haven asset that rises when investors are pushing stocks, and bond yields lower. The yen is set to draw demand if trade tensions intensify or if North Korea continues scales up its rhetoric or military exercises. The rogue regime has been testing short-range missiles in recent weeks, but the reports have failed to move markets. 

Inflation figures for the Tokyo region stand out on the Japanese economic calendar. Consumer Price Index (CPI) excluding fresh food is the most significant figure – and it is set to remain depressed below 1% – far from the Bank of Japan's 2% target. The data for the capital region is released before the national figures and has a more significant impact. 

Here are the events lined up in Japan:

Japan macro economic events August 26 30 2019

USD/JPY Technical Analysis

Dollar/yen's limited movement has stabilized the Relative Strength Index (RSI), but momentum on the daily chart remains to the downside. Moreover, the currency pair continues trading below the 50, 100, and 200 Simple Moving Averages. USD/JPY is capped by downtrend support which began in mid-July. Uptrend support is beginning has been broken on Friday..

All in all, the bearish remains bias.

Support awaits at 105.50 which was the initial August low. The current August trough is 105.05 – the lowest since January. Next, we find the 2019 low of 104.75.

Resistance awaits at 106.20, which held USD/JPY up in recent days. Next, we find 106.75, where the pair stalled in mid-August and also in late June. 107.20 was July's low and turns into resistance. It is followed by 107.80 and 108.20, which were cushions in June.

USD JPY daily chart August 26 30 2019

USD/JPY Sentiment

The Fed cannot stop Trump's trade wars – and that is likely to keep the safe-haven yen bid even if the dollar suffers.

The FXStreet Poll is showing that experts are bullish, perhaps seeing the late Friday fall as temporary. The targets for all terms have hardly changed, and are all in the 106 handle. Trump's recent tweets have not been factored by markets.

USD JPY experts August 26 30 2019

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