USD/JPY Forecast: Focus on the consumer after the Fed foiled the recovery

• USD/JPY has been on the back foot after Fed's Powell opened the door to rate cuts.
• The US consumer is in focus, and trade talks are eyed.
• Mid-July's daily chart paints a mixed technical picture.
• Experts are bearish in the short-term, bullish in the medium term and neutral afterward.

What just happened: Powell power play

Jerome Powell, Chair of the Federal Reserve, has presented a darker than expected picture of the US economy and opened the door to rate cuts – starting this month. Powell said that trade uncertainties continue weighing despite the trade truce, has said that weak inflation may become persistent and even refused to label the job market as hot.

His prepared remarks and his lengthy testimonies have weighed on the dollar, erasing early gains for USD/JPY that lost ground alongside US 10-year bond yields.

See Powell's Power Play: Fed's five dollar downers

Contrary to the Fed Chair's concerns, inflation has picked up in June. Core Consumer Price Index has accelerated to 2.1% year on year against 2.0% expected and limited the dollar's falls.

Apart from Powell – who dominated trading – the US and China have resumed high levels talks and labeled them "constructive." The calm atmosphere was later disrupted by President Donald Trump's tweets. The president said that China has been falling short on its commitment to buy US agricultural goods as agreed with his counterpart Xi Jinping. Tensions remain elevated and the trade truce seems fragile.

The Bank of Japan has reiterated its dovish stance. Haruhiko Kuroda, Governor of the Bank of Japan, said that he would continue using all measures to reach the 2% inflation target. Japanese machinery orders have been mixed.

US-Iranian tensions have somewhat defused despite Iran's announcement that it has breached the uranium enrichment levels it had agreed to into the JCPOA accord. The story had little influence on the safe-haven yen.

US events: Focus on the consumer

Trade negotiations between the world's largest economies are set to continue, and perhaps both sides will delve into the sensitive issues – intellectual property, forced transfer of technology, and other topics. Headlines suggesting progress can push USD/JPY higher while reports about major disagreements may send it lower.

The highlight of the economic calendar is on Tuesday with the retail sales figures for June. Consumption is central to the US economy, and last month's data will help assess GDP growth in the second quarter. The previous report for May came out within expectations – 0.5% on the headline and 0.4% in the all-important control group – the "core of the core."

Moreover, May's report included considerable upward revisions for April, thus boosting the chances of a significant expansion in the second quarter. Economists expect the control group to repeat the 0.4% increase now, while headline sales are projected to rise by only 0.3%.

Building permits and housing starts are due on Wednesday, and they may have a noteworthy impact if they both move in the same direction. They often tend to offset each other. The Fed's Beige Book is set to confirm Powell's assessment of a growing economy, albeit at a somewhat slower pace.

Thursday's Philadelphia Fed Manufacturing Survey for July is set to improve. It tends to move the dollar when it is substantially far from expectations.

The final economic indicator of the week circles back to the consumer. The University of Michigan's preliminary consumer sentiment measure for July will likely remain at similar levels to those seen in June – 98.2 according to the final read. The index has been holding its high ground in the past few months.

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

Japan: Moving with bond yields

The Japanese yen remains a magnet for traders in times of trouble. Concerns about trade, tensions in the Middle East, or news related to North Korea may have more impact than Japanese economic indicators. The correlation between the benchmark 10-year US Treasury yield and USD/JPY remains prevalent. 

Nevertheless, Japan's national inflation figures for June are of interest. Core figure such as those excluding food and energy has remained subdued – not only below 2% but also below 1%. Few changes are likely now. 

Here are the events lined up in Japan:

USD/JPY Technical Analysis

Dollar/yen has exited the long-term downtrend and has begun rising – hitting higher highs (uptrend resistance) and higher lows (uptrend support). However, momentum remains lackluster and the Relative Strength Index is stable around 50. Moreover, the pair has been unable to break above the 50-day Simple Moving Average and remains below the 100 and 200 ones.

Overall, the recovery is still in its infancy and remains vulnerable. 

Resistance awaits at 108.75 which has capped USD/JPY in mid-June. It is followed by the round number of 109.00, that has held it down in mid-July and worked as support beforehand. The next line is further away – 109.75 was a swing high in late May. 110.65, and 111.05 follow.

Support awaits at 108.15, which provided some support in mid-June. 107.75 was a cushion in early June, while 107.50 was a swing low in early July and also early in the year. 107.00 and 106.80 are next.

USD/JPY Sentiment

The Fed is data and trade-dependent, and USD/JPY will likely follow. A disappointing retail sales report and a breakup in trade talks could send dollar/yen plunging while a leap in sales and progress in negotiations may send it shooting higher.

The FXStreet Poll is showing that experts are bearish in the short term, are bullish in the medium term and neutral in the longer-term. All in all, it seems that traders and investors are somewhat puzzled by recent price action. Average objectives have been marginally downgraded.

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