USD/JPY Forecast: Fed focus as the mood sours

• USD/JPY was under pressure amid no progress in trade talks, mixed data, and also Brexit.
• A big bulk of US figures will give a clearer picture of the situation.
• The technical picture is still somewhat bullish.

This was the week: Trade going nowhere, mixed data

US data was mixed. Retail sales came out better than expected in January with the critical Control Group rising by 1.1%. However, the disastrous data from December became even worse with the most recent release, keeping economists perplexed.

US inflation was more straightforward and came out slightly below expectations: 2.1% YoY on the Core and 1.5% on the headline. Durable goods were not that straightforward, but were decidedly positive: the non-defense ex-air measure rose by 0.8%, significantly above expectations. It shows investment is on the rise once again. 

There was no substantial progress in trade talks. US Trade Representative Robert Lighthizer said that the US insists on changes to China's Intellectual Property policy, a thorny issue. Later, reports suggested that a summit between Presidents Donald Trump and Xi Jinping will be postponed to at least April. Late March had been touted as a potential timing. The postponement weighs on the market mood and USD/JPY.

Brexit: The world watched chaotic scenes in the House of Commons as the Brexit drama continues. UK PM Theresa May managed to receive some concessions from the EU, but it was not enough to pass her deal. MPs then voted to reject a no-deal Brexit and to opt for an extension of Article 50. This positive development for the pound improved the market and supported USD/JPY, but political developments continue at a rapid clip.

The Bank of Japan left its policy unchanged as expected, expressing concerns about slowing global growth, and falling short of surprising market players. 

Fed Chair Jerome Powell made several public appearances throughout the week but did not provide any new insights ahead of the all-important Fed decision.

 

US events: The Fed, and a few more things

The Federal Reserve decision stands out. The focus will likely be on the dot-plot. The last time that the world's most powerful central bank published forecasts were in December 2018 when it downgraded the estimate to two hikes in 2019.

Since then, the Fed made a substantial dovish shift, pledging patience on rate increases and also offering a rethink of its balance sheet reduction program. The global slowdown is the reason while the US economy is doing well.

And while the Fed preaches patience, does it mean it is done raising rates this year? The dot plot will help in providing an answer.

Here are three scenarios from the full Fed preview:

1) Gradual downgrade: A downgrade to one hike is reasonable and gradual, leaving the door open in case the global economy picks up again, and the local economy continues looking good. In this case, the greenback may rise, but gains could be limited.

2) No hikes this year: A downgrade to zero would open the door would be a damaging downgrade for the dollar. The greenback would fall on growing speculation that the next move would be a rate cut, 2020 or beforehand.

3) Shocking no-change: And if the Fed shocks markets by leaving the outlook unchanged at two hikes, the Dollar will be King again. This seems unlikely. 

The Fed is currently shrinking its balance sheet, but the process has contributed to the jitters in stock markets. Back in January, the Fed said it would examine the policy and officials hinted that the balance sheet reduction could end as soon as this year. 

For the dollar, the sooner it ends, the worse it gets for the greenback as the number of dollars in circulation will remain elevated, thus making it less valuable. An end of the program at the end of the year seems to be the base case. Going to 2020 would be dollar positive, and a near-immediate termination would be negative.

Also watch out for comments on the job market after the mixed NFP, on slowing inflation, and the local and global economies. 

Factory orders are expected to drop while jobless claims will likely be stable. Sales of existing homes, which have been falling, may move the market, but the echoes from the Fed decision are set to have the upper hand.

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

Japan: Safe-haven yen awaits trade news

Brexit: at the time of writing, a third vote on the deal is due on Wednesday, with the EU expected to discuss an extension to Article 50 on Thursday. Substantial moves in GBP/USD may see faint echoes in USD/JPY. 

Trade is now back on the backburner after a summit will take time to cook. Nevertheless, any developments will impact USD/JPY. If both sides get closer, it has room to rise, while public disagreements around Intellectual Property or other topics could hurt.

In Japan, the BOJ will have another chance to impact markets with the meeting minutes. Also, inflation figures on the national level for February are of interest. It is important to note that data from the Tokyo region for February are already out and they still show that the 2% inflation target is far.

USD/JPY and Japanese crosses will move more on the market mood than on data from the Land of the Rising Sun, as usual.

Here are the events lined up in Japan:

USD/JPY Technical Analysis

Dollar/yen is trading in an upward channel, as shown by the thick black lines on the daily chart. The recent move placed the pair just above the 200-day Simple Moving Average, a bullish sign. However, the battle continues. Momentum remains positive and the Relative Strength Index (RSI) is also on the rise but stays away from 70, thus not suffering from overbought conditions.

112.12 capped dollar/yen in early March. 112.60 was a support line when it traded on higher ground in November, and 113.15 had a similar role back then. 113.75 and 114 were peaks in late 2018.

111.45 is where the 200-day SMA meets the price, and it also held the pair down in the last days of 2018. 110.80 was the low on March 8th, and it is followed by 110.25 that was a support line during February and a separator of ranges. 109.50 was a support line in late January and 109.10 earlier that month. 108.50 was the low point where the uptrend support line begins.

USD/JPY Sentiment

The FXStreet forex poll of experts provides intriguing insights, as despite there's no love for the greenback, the pair is seen raising this upcoming week, with an average target pointing to a higher high for the year, at 112.27. Bears take over in the monthly and 3-month views. For the 1 month perspective, there's an impressive accumulation of targets around 110.00, a sign that speculative interest doesn't believe the Fed could do something for the greenback. In the 3-month view, and while the most targets are below the current level, yet the range of possibilities goes from 105.00 to 118.00, signaling the absence of certain directional conviction. 

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