USD/JPY Forecast: Can optimism prevail? Trade comments and the consumer hold the key

• USD/JPY has extended its gains after the US and China scheduled talks.
• Trade developments, retail sales, and inflation figures stand out.
• Mid-September's daily chart is showing a positive turn for USD/JPY.
• Experts see short-term gains and a fall afterward.

The world's largest economies have been showing signs of a detente – sending USD/JPY higher as US data was sufficiently upbeat to underpin the dollar. The upcoming week features critical consumer figures and potential trade-related headlines. 

This week in USD/JPY: Markets believe US-Sino optimism

US treasury secretary Steven Mnuchin and trade representative Robert Lighthizer have spoken with Chinese Vice Premier Liu He and agreed on meetings in October. The announcement about the conversation has ended speculation that only low-level talks were going on. Moreover, upbeat comments from Washington – and especially from Global Times' Hu Xijin – lifted spirits. Xijin tends to hold a nationalistic line, and some consider him the mouthpiece of the regime. His surprisingly positive tones have boosted markets. 

Moreover, Hong Kong abandoned the controversial extradition bill that sparked protests in the financial hub. The situation in the city-state has also contributed to tensions between China and the West.

USD/JPY has been on the rise as traders sold off safe US bonds. Rising US bond yields – helped the greenback advance against the yen – which lost its shine as a safe-haven asset.

US data has been mixed. On the one hand, ISM's Purchasing Managers' Index (PMI) for the manufacturing sector dropped below 50 – the worst since 2016 and reflecting a contraction in the sector. That figure stoked fresh fears of a recession. On the other hand, ISM's survey for the services sector beat expectations with 56.4 points – representing robust growth. 

US Non-Farm Payrolls were mixed. The economy gained only 130K jobs in August and suffered downward revisions. However, wages rose by 0.4% MoM and 3.2% YoY. Alongside an encouraging increase in participation – 63.2% – the labor market remains robust. 

Tensions are mounting toward the Federal Reserve's all-important rate decision on September 18, and officials at the bank took advantage of their last opportunities to spell out their desired policies. James Bullard, President of the Saint Louis branch of the Federal Reserve, signaled that he is ready for significant stimulus – a rate cut of 50 basis points and not the standard 25bp. On the other hand, his counterpart at the Boston Fed, Eric Rosengren, said that rate cuts are unnecessary. 

Important note: Jerome Powell, Chair of the Federal Reserve, will speak out just late on Friday, September 6, and may convey a clear message to guide markets. 

US events: Weaker consumption expected

Tweets from Xigin, US President Donald Trump, and any other comments related to trade talks will be of interest. It is essential to remember that both countries plan more tariffs in October and in December.

If the administration surprises by announcing the suspension of new levies, stocks have room to rally alongside USD/JPY. However, if talks break down in acrimony once again, sentiment may sour, and the currency pair could plunge.

The economic calendar features top-tier events in the latter part of the week. Producer prices, due out on Wednesday, serve as a warm-up to critical Consumer Price Index (CPI) report on Thursday. Inflation surprised with rises of 0.3% in both the headline CPI and core prices in July, resulting in an annual increase of 2.2% in yearly Core CPI – the most significant figure. Another acceleration is on the cards now – to 2.3%. Any deviation may rock the dollar. 

The US consumer is in the spotlight on Friday. In July, retail sales jumped by 0.7%, and a modest increase of 0.3% is projected for August. The retail sales control group – or "core of the core" – carries expectations for an advance of 0.4% – substantially below the leap of 1% reported in July. Consumption has held up the US economy of late, and investors will want to see ongoing trends. 

The last word of the week belongs is related to the previous one. Just 90 minutes after the retail sales figures, the University of Michigan publishes its preliminary Consumer Sentiment Index for September. The final number for August severely disappointed with 89.8 points – the lowest since 2016 – triggering alarm bells. A bounce back to 94 points is on the cards now.

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

Japan: Focus on GDP

Update on Japanese Gross Domestic Product stands out on the economic calendar. An upgrade from 0.4% to 0.5% QoQ expansion in the second quarter is on the cards. Industrial output due out late in the week is also of interest as manufacturing sectors all over the world are struggling.

Nevertheless, the yen moves first and foremost in reaction to the mood in global stock markets and has an inverse correlation with them. Investors seek the safety of the Japanese currency in times of trouble. As long as the trade truce between the US and China continues, the yen may come under pressure. 

Here are the events lined up in Japan:

USD/JPY Technical Analysis

USD/JPY has broken above a downtrend resistance line that it touched no less than four times. The confirmation of this move and upside momentum on the four-hour chart are bullish signs. However, the pair has stalled at the 50-day Simple Moving Average, which hits the prices at 107.25 – a swing low in mid-July. 

If USD/JPY manages to surge above 107.25, the next cap is 107.50 that provided support in early July. Next, we find 108.10 that was a gap line in June, followed by 108.40 that was the bottom of a high range in July. 109.35 is next.

Support awaits at 106.75 which held USD/JPY down during August. Further down, 105.75 is the next noteworthy cushion after providing support in early September. It is followed closely by 105.50 that held it up in early August and 105.05 that had the same role in mid-August. 

USD/JPY Sentiment

The current trade truce between the US and China should hold until they meet in early October. That should provide some calm and trigger yen selling. However, the damage from trade wars has been done, and unimpressive US data may cap any gains.

The FXStreet Poll is showing a bullish bias in the short-term but lower levels afterward. It seems that experts expect another leg higher on current trade optimism but are skeptical regarding further moves. The short-term target has been upgraded while the long-term one has been downgraded.

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