USD/JPY Forecast: Brexit troubles weigh, and so do Fed doves

• The USD/JPY was pressured on safe-haven flows due to Brexit uncertainty, Fed dovishness
• A light calendar leaves room for trade, Brexit, and Italy to impact the pair.
• The technical picture is only slightly bullish for the pair. The FX Poll shows a deteriorating sentiment over time.

This was the week: Brexit and other risk events joined by some Fed dovishness

Brexit: The EU and the UK reached a draft withdrawal agreement or a Brexit treaty. The news sent the Pound higher but it retreated after several resignations from May's government. The moves in GBP/USD were echoed by USD/JPY in a milder manner, more to the downside and especially on the resignation of Brexit Minister Dominic Raab. The Yen works as a safe-haven currency. 

Powell: Fed Chair Jerome Powell spoke in Texas. He noted weaker global growth and warned about the long-term implications of the US budget deficit. However, he seemed to shrug off the recent falls in stocks and did not signal any change in policy. 

However, Richard Clarida and Robert Kaplan, two other Fed members, already tipped the greenback lower. Late in the week, both FOMC officials expressed concern about the headwinds coming from the global economy. In addition, they did not seem to be in any rush to raise interest. Their words sent yields and the US Dollar in a sharp move.

Trade: The US and China continue negotiating trade ahead of the Trump-Xi meeting in Buenos Aires at the end of the month. There were reports about Chinese concessions and also about an American willingness not to impose further tariffs. US Trade Representative Robert Lighthizer denied the latest reports.

US data: US data fell slightly short of expectations with Core CPI at 2.1% and Retail Sales at 0.3%. The latter report included downward revisions. However, the misses were mostly modest, and some data points slightly beat expectations. The data remain upbeat in general.  North Korea: Talks between the US and the rogue Asian nation were put on ice due to a lack of progress. In addition, reports came out about the regime's continuing work on nuclear facilities. The story did not have an effect on markets but could support the Yen if things deteriorate.

Italy: The third-largest economy in the euro-zone responded defiantly to the European Commission's request to modify its budget and left both the deficit and growth forecasts unchanged. The clash moved to the backburner but could still have an impact.

Japanese data: Japan reported a squeeze in its economy in the third quarter: -0.3%, within expectations. One-off contractions are common in Japan. Nevertheless, the downturn, due to floods, implies loose monetary policy for longer.

US events: Thanksgiving

After several busy weeks, the US calendar is lighter. US traders will be on holiday on Thursday, celebrating Thanksgiving. Trading volume is set to be low on Thursday with a minor pick up on Friday. 

Ahead of the holiday, the US publishes housing data on Tuesday: Building Permits and Housing Starts have an impact if they both go in the same direction: either beating expectations or missing them. However, the figures often offset each other. 

The most significant figure of the week is due on Wednesday. Durable Goods Orders advanced by 0.8% in September, but excluding Transportation, they rose by only 0.1%. The figures for October provide the first input to Q4 GDP. The Fed has recently expressed concern about business investment. 

Existing Home Sales are also due on Wednesday. They fell sharply to an annualized level of 5.15 million in September, extending the series of disappointments and the concerns about the housing sector. 

Apart from the calendar events, any developments on trade talks between China, and the US will be of interest. Tweets by Trump can have a substantial impact, as we have seen when he published his successful phone call with Xi. 

The Mueller investigation continues in the background, and there is speculation that new indictments and revelations are due. The greenback suffers from political uncertainty. 

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

Japan: Safe-haven flows and a BOJ report

The Japanese Yen will likely continue rising on safe-haven flows related to various concerns. This includes issues in the US-Chinese negotiations, Brexit, and the next step in the Italian crisis. The European Commission is set to announce the next steps and it may be disciplinary action. While the Euro will see the most significant impact, the yen will also move.

Movements in stock markets continue affecting the pair, with a direct correlation. However, when equity markets are more stable, the correlation is weaker. 

In Japan, trade data kicks off the week. Drops in imports and exports may imply a further deterioration in global trade and could boost the safe-haven yen. The Bank of Japan releases its Monetary Policy Statement on Tuesday and it could provide insights into the BOJ's thinking. The Tokyo-based institution downgraded the forecasts for inflation lately. The document may include fresh forecasts for growth and inflation.

Inflation figures for the national levels are published after the data for Tokyo but still matter. Core inflation remains far from the BOJ's 2% target and is unlikely to get closer in this report. 

Here are the events lined up in Japan: 

 

USD/JPY Technical Analysis 

USD/JPY lost the steep uptrend channel (thick black line), following a pattern is seen in September. On the other hand, Momentum remains positive and the pair trades above both the 50-day Simple Moving average (which is around 112.80) and the 200-day SMA which is just above 110. The Relative Strength Index (RSI) is fairly balanced.

A convincing break below the 50-day SMA would tilt the picture in favor of the bears. This has not happened yet.

113.60 provided support in November and also in early October. 114.25 capped USD/JPY in mid-November. 114.55 was the highest point in 2018 and towers above. Higher, 115.50 and 116 are eyed.

113.15 was a high point in July and also served as support in mid-November. 112.60 was provided support in early November. 111.80 served as resistance in late August. 111.40 was the low point in October, where the recent rally began.

 

USD/JPY Sentiment

The FXStreet forex poll of experts shows a bullish sentiment in the short term, a neutral one afterward, and a bearish tendency in the long-term. The average forecasts have been slightly downgraded in the past week.

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