USD/JPY Forecast: Downside favored on low prospects of breakthrough US-China trade deal

The USD/JPY pair picked up a strong bid on Friday as whispers of progress in the US-China trade talks pushed up Treasury yields, forcing investors to move out of the anti-risk Japanese yen.

Notably, the currency pair closed higher for the second week, having breached the ascending triangle pattern in the Asian trading hours on Friday.

The bull breakout was likely triggered by reports the US and China were considering making concessions ahead of the high-level trade negotiations, scheduled for Jan. 30 and 31.

WSJ reported last week that the US is considering lifting or reducing tariffs on Chinese imports with the aim to win Beijing's support for deep structural reforms. Meanwhile, China reportedly offered to ramp up imports from the US worth $1 trillion over a six-year period and bring down its trade surplus with the US to zero.

Even so, the bid tone around the US dollar seems to have weakened. As of writing, the pair is flat-lined around 109.60, having clocked a high of 109.89.

Moreover, the two sides have made little or no progress on key issues like Chinese theft of American intellectual property. That was confirmed by the US treasury in a meeting with lawmakers last week.

Further, experts believe China's massive buying spree would likely fail to eliminate its trade surplus with the US as American farmers/producers may not be able to respond quickly to increased Chinese demand. Moreover, none of that would address US demand for Chinese-produced goods and China's control of the assembly of products such as smartphones and laptops or some of the main drivers of the US trade deficit, according to a Bloomberg report.

Put simply, prospects of a breakthrough US-China trade deal are quite low. USD/JPY, therefore, may have a tough time scaling the psychological barrier of 110.00 in a convincing manner.

Weekly chart

The pair closed at 109.77 on Friday, confirming a bullish doji reversal. The 14-week relative strength index (RSI), however, is still biased bearish below 50.00. Further, 5- and 10-week moving averages (MAs) are trending south.

As a result, a re-test of the downward sloping 5-week MA, currently at 109.33 could be on the cards.

4-hour chart

RSI's breach of the rising trendline on the 4-hour chart, if confirmed, would open up downside toward 109.00. Validating that argument are the 5- and 10-candle MAs, which beginning to roll over in favor of the bears.