USD/JPY Forecast: Eyeing the US consumer after Powell's patience reaches its limits and bears take control

• USD/JPY has stabilized as the Fed opened the door to cutting rates amid raging trade wars.
• The upcoming week focuses on the US consumer, but traders should watch politics as well.
• The technical outlook for the second week of June remains bearish.
• The FX Poll shows a bearish bias in the short term and a bullish one afterward.

What just happened: Fed opens the door to a cut

The US-Sino trade war has been intensifying once again. China has held its ground – saying it will not give up, issuing a travel warning regarding visits to the US, and making preparations to limit exports of rare earth. The US has made preparations to import such products from other countries, blaming China for the failure of the talks, and more.

President Donald Trump has continued criticizing Mexico for allowing migrants despite his southern neighbor's pledge to do more. At the time of writing, the US plans to slap Mexico with a 5% tariff on all goods on Monday after talks in Washington have failed to yield an agreement. The old-new trade front has implications beyond US-Mexican relations and has also weighed on markets.

The high tensions – lasting for a month – have finally shifted the Federal Reserve's thinking. James Bullard, President of the Federal Reserve branch of Saint Louis, has been the first to suggest the Fed should cut interest rates and do it soon. Fed Chair Jerome Powell followed by saying that the central bank is worried about trade uncertainty and will "act as appropriate" – moving away from the "patient" policy on rates – and raising speculation of the Fed slashing prices.

Markets are currently pricing in two rate cuts this year – with weak data also contributing to the worries. The ISM Manufacturing purchasing managers' index points to a slowdown in the sector that is dear to Trump. The services sector is doing better with the ISM beating expectations with 56.9 points. The ADP Non-Farm Payrolls has shown an increase of only 27K private sector jobs – the worst since March 2010. 

The official Non-Farm Payrolls were the final blow to the greenback. The US economy gained a meager 75K jobs in May and revisions reduced 75K off the numbers for March and April. Moreover, wages rose by only 0.2% against 0.3% on a monthly basis and 3.1% year on year, a deceleration from 3.2%. 

The mix of escalating trade wars and mostly weak data has pushed USD/JPY lower. However, as it becomes clear that the Fed is ready to act, the mood of the market improves – diminishing demand for the safe-haven yen. All in all, the currency pair's weekly drop was muted in comparison to previous weeks.

Bank of Japan Governor Haruhiko Kuroda has reiterated his dovish stance – keeping monetary policy loose until the ever-elusive 2% inflation target is reached. 

US events: Consumer in focus

US Treasury Secretary Steven Mnuchin will meet People's Bank of China Governor Yi Gang at the G-20 gathering of finance ministers and central bankers – the first high-level meeting since talks broke down in early May. 

The Mnuchin-Gang encounter and perhaps tweets from President Trump may set the tone for markets at the wake of the new week as echoes from the NFP fade away.

If the US moves forward with imposing duties on Mexico – a move that some doubt that will happen – the markets are set to fall, dragging USD/JPY down. While 5% is negligible, hitting Mexico after signing a trade deal would serve as a warning to China and to the others that the US cannot be trusted. It would also send a message that Trump is keen on fighting rather than winning.

Tuesday's producer prices are of interest and may serve as a warm-up towards Wednesday's all-important inflation data. Prices have accelerated in April with the consumer price index (CPI) hitting 2% year on year and critical core CPI rising to 2.1% – providing some relief for the Fed. Any change in core prices will be closely watched and may tilt the final decision of the central bank in the following week.

The consumer comes into play on Thursday. Retail sales have disappointed by falling by 0.2% on the headline and remaining flat on the critical control group. Economists forecast better data for May, with a substantial increase. Consumption is key to the US economy and has a major contribution to GDP – the Fed is watching this figure very closely.

The last word of the week also belongs to the American shopper. The University of Michigan releases its first estimate of consumer sentiment for June, and it may show a drop in comparison to the round 100 level that was seen in May. A lower score implies a slowdown in consumption.

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

Japan: Watching GDP and safe-haven flows

The Japanese yen remains the ultimate safe-haven currency – rising and falling with global prospects and stock markets.

Economic data tends to play second fiddle, but the revised GDP report early in the week may move the currency – especially as the final version tends to differ from the preliminary one significantly. The economy grew by 0.5% quarterly and 2.1% year on year. A downgrade may be seen now.

Industrial production is another notable publication, and it may have risen in April after dropping by 1.1% in March.

Apart from the trade tensions mentioned earlier, other risk factors include North Korea and Iran, which are both on the backburner for now. 

Here are the events lined up in Japan:

USD/JPY Technical Analysis

All signs have been pointing to further falls for dollar/yen – it remains capped by the downtrend resistance line, momentum is to the downside and the pair trades below the 50, 100, and 200 Simple Moving Averages on the daily chart. 

Below the late January low of 108.50, support awaits at 108.00 which was a low point in January and also in early June. It is closely followed by another trough from the same time at 107.80, and finally by 107.50 which is where the pair stabilized after flash-crashing to 104.76 at the wake of 2019.

Upside resistance awaits at the round number of 109.00 which supported USD/JPY in early May. Further up, 1089.90 was a swing high later last month and is another critical line. The next cap at 110.65 is even stronger – the confluence of the 50 and 100 days SMA as well as a peak from mid-May. 111.05 and 111.65 are next.

USD/JPY Sentiment

It is hard to see any reasons for USD/JPY to recover. Signs of a global slowdown, intensifying trade tensions, and willingness from the Fed to cut interest rates all point to the downside. 

The FXStreet Poll shows a bearish bias in the short term but a bullish one afterward. Despite the bullish stance in the medium and long terms, the targets have been substantially downgraded. Experts may be foreseeing a prolonged trade war.

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