USD/JPY Forecast: Fed to fuel the next move after rally ran short

• USD/JPY has jumped in response to trade hopes but slid back alongside economic data.
• The Fed dominates the scene with Powell's testimony and the meeting minutes.
• Mid-July's daily chart implies further falls are more likely than not.
• Experts are bearish on USD/JPY in the short and medium terms.

What just happened: Trade talks resume, economy bites

Presidents Donald Trump and Xi Jinping have agreed to resume trade talks and refrain from slapping new tariffs. While this "trade truce" was expected, markets enjoyed a relief rally, and USD/JPY opened the week with a gap to the upside. The safe-haven yen tends to sell off in response to positive news.

Later on, the world's largest economies seemed unable to agree on what was decided regarding Huawei – the controversial Chinese telecommunications giant. Has the ban on the company buying US goods been removed? That remains an open question. Overall, the truce falls short of a full deal and duties imposed in the past year remain in place. Markets have remained cautious later in the week, and USD/JPY came under pressure.

US data has been mostly disappointing until Friday's Non-Farm Payrolls. The US economy has gained no less than 224K positions in June, far better than 160K expected. While wage figures missed expectations with only 0.2% month on month, the US dollar soared on the release as the chances for a full cycle of rate cuts has diminished.

See NFP Quick Analysis: Time for USD bulls to enjoy the fireworks – the Fed's cut may be a one-off

Beforehand, ADP Non-Farm Payrolls have come out below expectations for the second consecutive month with a meager 102K jobs gained in June. The ISM Non-Manufacturing PMI dropped from 56.9 in May to 55.1 points in June, indicating a slowdown in America's services sector. Factory orders fell by 0.7% in May. 

The early data increased speculation of a more significant slowdown in the economy and pushed bond yields lower. USD/JPY is correlated with US yields, adding to the pressure. However, yields turned around in response to Friday's employment numbers.

US events: Fed all over the place

The upcoming week kicks off with the most significant influencer on markets – Fed Chair Jerome Powell. The Chair will speak on Tuesday in Boston, but his public appearance on Wednesday is of higher importance. Powell will testify before the House Financial Services Committee and will have the opportunity to respond to the jobs report and other economic developments. It will be interesting to see if he reiterates concerns related to trade or if he is content with the trade truce. 

Investors will scrutinize every word, trying to understand if the Fed intends to cut interest rates only once – as an insurance policy – or embark on an easing cycle as markets project. Officials have recently attempted to moderate market expectations regarding rate cuts, and his testimony may convey a calmer message as well – perhaps disappointing stock markets and US dollar bears which eye substantial cuts

Powell moves to face the Senate Banking Committee on Thursday and in between, the Fed meeting minutes will be closely watched. The publication documents the June decision which has opened the door to cutting interest rates. The minutes will complement the Chair's testimony by complementing it with different views of all the Federal Open Markets Committee (FOMC). The Fed is well aware of the impact of minutes, which are revised until the very last moment. 

A critical event for the Washington-based institution is due on Thursday – the Consumer Price Index (CPI) data for June. Subdued inflation has puzzled the Fed and contributed to the dovish shift. Powell and his colleagues no longer describe weak price development as transitory. Back in May, core CPI – which excludes food and energy – has slowed to 2.0%. Another deceleration below the round number may push the greenback lower.

Friday's release of producer prices is also of interest, especially if CPI figures meet expectations.

Apart from the Fed, markets are awaiting headlines from US-Sino trade talks. At the time of writing, Washington and Beijing have scheduled a telephone conversation to restart negotiations. The differences remain wide. If they announce a breakthrough, USD/JPY may jump. Yet if the initial talks result in a breakup of talks, the safe-haven yen will likely be in high demand. The most probable scenario for the upcoming week is that both sides will report "constructive talks" – without revealing any details.

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

Japan: The ultimate safe-haven currency remains in play

The Japanese yen maintains its status as the ultimate safe-haven currency. Any flare-up around Iran or North Korea may boost the currency – in addition to USD/JPY's correlation with stocks and bond yields. When the return on US 10-year treasuries falls, dollar/yen tends to follow. 

In Japanese, machinery order data for May is of interest, but perhaps industrial output figures may draw attention. It is important to remember that Japanese economic indicators tend to have little impact on the yen.

Here are the events lined up in Japan:

USD/JPY Technical Analysis

USD/JPY has broken above the downtrend resistance line but has not gone too far. It may be heading back down. The currency pair continues trading below the 50, 100, and 200-day Simple Moving Averages and momentum remains to the downside.

Support awaits at 107.80 which has provided support in early June. It is followed by 107.50 that capped USD/JPY in late June and then served as support in early July. The round number of 107 was a temporary point on the way down last month, and the five-month low of 106.80 is next down the line.

Initial resistance awaits at 108.15 which supported dollar/yen in early June. It is followed by 108.50 which was the high point in July so far, and then by 108.75, that capped a recovery attempt around the same time. 109 worked as support in May.

USD/JPY Sentiment

Unless the US and China announce a breakthrough, the Fed's reluctance to ease monetary policy aggressively may weigh on the market mood and drag USD/JPY lower as well.

The FXStreet Poll shows that experts are bearish in the short and medium terms but see USD/JPY rising later on. It is essential to note that the average targets are within some 60 pips of each other, indicating limited movement. The short-term and long-term targets have been marginally upgraded in comparison to last week.

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