USD/JPY Forecast: Fed-support is not enough, inflation and trade talks will have their say now

• USD/JPY remained in range in a rough week that included the Fed and the NFP.
• Fed speakers and inflation data stand out.
• The technical picture is more balanced for the pair and experts in the poll see sideways movement in the short term.

What just happened: Not-so-dovish Fed

The US dollar was on the back foot early in the week, but the Federal Reserve turned things in favor of the greenback. The Fed´s preferred measure of inflation, Core PCE, disappointed with a deceleration to 1.6% YoY. Together with a fall in the ISM Manufacturing PMI and its inflation component, markets expected the Fed to highlight low inflation and a hint of an upcoming rate cut.

However, the Fed and its Chair Jerome Powell preached patience once again. The central bank is no hurry to raise interest rates, but it found many reasons to be cheerful, from a booming labor market, through encouraging growth figures, to an uptick in global growth. Most importantly, Powell described low inflation as transitory, expressing confidence that it will rise back to target.

The greenback shot higher and gradually extended its gains. The currency was also buoyed by expectations for elevated gains in employment stemming from a robust increase of 275K in the ADP NFP. 

The indicative figure from ADP was largely correct. The official Non-Farm Payrolls came out at 263K, an impressive increase in positions. Wage growth came out a bit below expectations with 0.2% MoM and 3.2% YoY, limiting the US Dollar's gains. Nevertheless, it is more than good enough for the Fed.

See NFP Quick Analysis: The Fed was right, and the USD can continue climbing

The US-Sino trade talks continued with further high-level discussions. Both sides remain optimistic and seem ready to make concessions. Some media outlets suggested an agreement will come as early as the upcoming week, but it will probably make more time. 

Movements related to the Japanese yen played second-fiddle with no substantial Japanese figures on the docket. The worsening political crisis in Venezuela had a small positive impact on oil prices and a negligible effect on the safe-haven Japanese yen.

US events: CPI in focus

The upcoming week is not as busy but ends with the fresh inflation figures. Powell's assertion that low inflation in the first quarter was transitory will come to a test with the consumer price index numbers for April, the first month of Q2.

Expectations stand at a small acceleration in the critical Core CPI YoY number from 2% to 2.1%. Headline CPI is also projected to hit 2.1% YoY. Deviations in monthly numbers will come to the spotlight if the yearly numbers hit expectations. 

Producer prices, released on Thursday, will serve as a warm up to the CPI data. Fed officials are scheduled to speak during the week and may provide their insights on the recent decision and the inflow of data.

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

Japan: Trade talks and the BOJ's minutes

The Japanese yen will continue moving mostly on the market sentiment, and the main theme is trade. Negotiations between Robert Lighthizer and Steven Mnuchin on the American side and Liu He on the Chinese one continue.

The prevailing optimism needs to turn into substance with a deal or at a minimum, a summit between the presidents. The yen may be sold off on a breakthrough and could gain if talks turn sour.

Turning to events in the Land of the Rising Sun, the Bank of Japan's meeting minutes stand out early in the week. The document will likely reflect the BOJ's quixotic struggle to push inflation higher, reflected in its ultra-loose monetary policy. 

Here are the events lined up in Japan:

USD/JPY Technical Analysis

Dollar/yen continues trading within the narrowing limits of the wedge (thick black lines on the chart). The currency pair will eventually need to decide if it breaks above the downtrend resistance line that started in 2018 or below uptrend support that was formed at the wake of 2019. At the moment, it is trading well within the range.

USD/JPY is trading around the 50-day and 100-day Simple Moving Average but above the 200-day one. The Relative Strength Index and Momentum lack direction. Overall, the technical picture is balanced for the pair.

The 50 and 100 and SMA are converging around 111.40, making it a significant battle line. Resistance awaits at 112.15 that held the currency pair down in early March. It is closely followed by 112.40 that is the high point of the year, recorded in late April. The next noteworthy cap is only at 113.65 that was a resistance lien in December. The round 114.00 level is next.

Some support awaits at 111.05 which was a swing low in early May. 110.80 was a swing low in early March, and the next cushion is only at 109.75 that was a low point in late March. Lower, 108.50 was a swing low in late January and serves as another support line.

USD/JPY Sentiment

The pair is gradually rising, taking two steps forward and one backward. After edging lower in the past week, can the pair rise? Friday's inflation report and more importantly, the fate of trade talks, will determine the next move. 

The FXStreet Poll shows that the short term bias is neutral, it becomes bullish afterward, and then turns bearish. However, it is important to note that the targets are close to each other and have not materially changed from the previous week. It seems that the lack of action has influenced forecasters to tighten their targets

Related Forecasts

• EUR/USD Forecast: Powell fully controls the dollar
• AUD/USD Forecast: to cut or not to cut, RBA takes center stage
• GBP/USD Forecast: Brexit talks and GDP set to break the balance