USD/JPY Forecast: Further gains on the cards if Trump continues on the current path

• The USD/JPY extended its gains and reached the highest levels since February.
• The upcoming week features US retail sales, plenty of Fed speeches and geopolitics as always
• The technical picture is now outright bullish for the pair. 

Risk on and rate hike expectations

The USD/JPY had many reasons to rise:

1) TPP is back: After Trump abandoned the Trans-Pacific Partnership early in his tenure, the other 11 nations including Japan continued talking and reached a deal. Now, with the advice of Larry Kudlow, Trump is said to want to get back and strike a deal. Optimism about trade diminishes demand for the safe-haven Yen.

2) Lower US-China trade tensions: The world's No.1 and No. 2 economies lowered the tone early in the week and now China provided a trust-building move of sorts. China's trade balance for March surprised with a deficit (seasonal reasons were likely behind it). Moreover, the figures showed a surge of Chinese imports from the US, providing some comfort to the Administration.

3) Syria tensions go down after they went up: The situation escalated since the Assad regime attacked its citizens with chemical weapons last weekend. The US vowed to retaliate and Russia, an ally of the Syrian government, also upped the ante. Yet things have changed. Now we hear reports about US-Russian coordination. Also, Trump hinted that an airstrike may not be imminent. This toning down via Trump's tweets also pushes the yen lower.

4) BOJ insists on accommodative monetary policy: The yen received a blow not only due to its role as a safe-haven. After speculation that the Bank of Japan may start withdrawing monetary stimulus in FY 2019, the Governor of the BOJ Haruhiko Kuroda stated that loose monetary policy is here to stay. 

5) Rising odds for a rate rise: It is not only the selling of the Japanese Yen but also some strength of the greenback. US inflation came out as expected at 2.4% YoY on the headline on 2.1% on the more significant Core CPI. Nevertheless, the rise from 1.8% YoY represents a shift up in prices, something that supports more rate hikes. In addition, the FOMC Meeting Minutes revealed that officials are more confident about the economy. The probability of a rate rise in June has topped 80% and four moves in 2018 seem like a likely scenario. Moreover, Boston Fed President Eric Rosengren said the Fed may raise rates more times than reflected in the dot-plot, a clear hint for four hikes.

All in all, the USD/JPY has all the reasons to rise. 

Not all was perfect for the pair. The University of Michigan's Consumer Sentiment dropped to 97.8 points, short of 100.5 that was expected and breaking the winning streak. JOLTs job openings also fell from the highs and stood at an annualized level of 6.052 million, below 6.173 million that was forecast.

In addition, Trump was troubled by new revelations by former FBI Director James Comey and the retirement of House Speaker Paul Ryan. Nevertheless, the political turmoil and the few weak datapoints were overshadowed by better data and optimism about trade.

US events: Retail sales and lots of Fed-speak

 

For a change, the most important event of the week is due early on: US retail sales. The US economy is centered around consumption and this is a key event. March headline sales are projected to increase by 0.3% MoM, a faster pace than 0.2% in February. The Control Group carries expectations for an increase of 0.4% after an underwhelming 0.1% last time. 

Housing data are in the limelight on Tuesday. Building Permits and Housing Stars often go in different directions, offsetting the movement. However, when they both rise or both fall, the greenback certainly reacts. Thursday sees the release of weekly Initial Jobless Claims (which remain at the lows) and also the Philly Fed Manufacturing Index. The Beige Book, an overview of the Fed about the economy is out on Wednesday. 

Yet after the Retail Sales report on Monday, Fed speakers take center-stage. The most important speech is on Tuesday, from incoming New York Fed President John Williams. His new role is powerful, as the de-facto No. 2 in the Federal Reserve and a permanent voter on the FOMC. He has moved from being a moderate dove to an outright hawk and optimist as the President of the San Francisco Fed. His words carry more weight now.

In addition, Atlanta Fed President Bostic (dove) speaks on Monday. Quarles, a Trump nomination responsible for regulation will be on the docket on both Tuesday and Thursday. Outgoing NY Fed President Dudley speaks on Wednesday and he still matters. Last but not least, Mester, a hawk, speaks on Thursday. She is currently a regional Fed President but is seen as a candidate for a higher position. 

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

Japan: Further inflation figures and geopolitics

Japan's trade balance is due late on Tuesday. A wider trade surplus may support the currency. Another event to keep an open eye on is the National inflation data for March. The most important figure is the National CPI Ex-Fresh Food which is expected to slide from 1% to 0.9%. 

As usual, geopolitics is a bigger driver of the Japanese Yen, in its role as a safe-haven currency. The situation in Syria is far from being resolved. Markets now assume a surgical strike by the US that will not involve the Russians nor the Iranians. The resolution can be better but can also be a more adverse one. Things can happen over the weekend or afterward. Uncertainty is still high.

We have not heard too much from the Korean peninsula, where preparations for a summit between South Korean President Moon and North Korean leader Kim are underway. Recent developments have been constructive and any news can move the yen.

Here are the events lined up in Japan: 

USD/JPY Technical Analysis: Fairly balanced

 

The USD/JPY is trading at the highest levels since February. In addition, it also broke above the 50-day Simple Moving Average that capped it for a long time that stands at ¥106.90 at the time of writing. With the RSI around 60, it points to further gains without reaching oversold territory. In addition, Momentum is accelerating.

On the topside, the mid-February peak of ¥107.90 is not too far away. Further above, the ¥108.50 that served as support early in the year and now works as resistance. Beyond this level, ¥110.00 is a crucial psychological level.

¥107.50 was a swing high in mid-March and the pair is still undecided about it. The next support line is found at ¥107.00, a round number that capped the pair in March, just above the 50-day SMA. The last line to watch is ¥105.90, a level that worked in both directions last month.

More: USD/JPY is well supported and has room to the upside — Confluence Detector

What's next for USD/JPY?

Optimism about the TPP, US-China relations, Korea, and Syria is somewhat elevated and priced into the sell-off of the Yen. However, the rising chances of four rate hikes in the US are not. Assuming Trump does not wreck havoc on all these fronts, the pair could advance on interest rate expectations. However, assuming that Trump will not change his mind is an assumption that is hard to make. All in all, we could see further increases, with potentially sharp pullbacks. 

The FXStreet FX Poll shows a bullish sentiment in the near-term, a more cautious one in the medium term and optimism in the long-term. This is broadly in line with the sentiment expressed here.