USD/JPY Forecast: May further fall after failing to fire up with the Fed, Trump's tariffs

• USD/JPY has hit two-month highs but retreated as the Fed cut rates, and Trump slapped tariffs.
• The US services sector report, trade developments, and Fed speculation are set to dominate. 
• Early August's technical daily chart sends mixed messages.
• Experts see a short-term extension of the falls but advances in the medium and long terms.

USD/JPY volatility is back – that is the only certainty after a week which saw the currency pair test the extremes of the past months' range.  A relatively hawkish Federal Reserve has sent the dollar higher – but falling stocks and US bond yields support the safe-haven yen. And then came Trump with a shock announcement of new tariffs on China – just as markets moved their attention elsewhere – and dollar/yen plunged with bond yields. These topics will continue in the new week.

What just happened: Trump's tariffs erase all Fed gains

The world's most powerful central bank has had a strong impact on markets – yet perhaps not the one that stock bulls had hoped for. The Federal Reserve has cut interest rates for the first time since the crisis – as broadly expected – and also ended the reduction of its balance sheet two months ahead of schedule. 

On the other hand, Fed Chair Jerome Powell has labeled this monetary stimulus as an "insurance cut" intended to mitigate downside risks, mostly coming from outside the US. The bank reiterated that the labor market "remains strong" and Powell said that that the outlook remains favorable. 

While he was unable to rule out further rate cuts, he stressed that this is not the beginning of a cycle of rate reductions that are typical to a recession. Moreover, two members voted against slashing rates – showing that doves may face opposition to additional moves. 

See Fed Analysis: Three reasons why the dollar may continue dominating

As the cut was priced in and markets hoped-for promises of more stimulus, the US dollar advanced across the board, sending EUR/USD and GBP/USD to multi-year lows. However, when facing the yen, the greenback ran into resistance. While USD/JPY hit the highest levels since May, it swiftly returned to the range. The safe-haven yen found demand as US ten-year Treasury yields dropped below 2%.

High ranking officials from the US and China have met in Shanghai for the first face-to-face high-level trade talks since May. At first, the negotiations seemed doomed by US President Donald Trump's boasts of winning the trade war against China and causing five million jobs lost. However, both sides have concluded the talks by saying they were "constructive" and have scheduled new negotiations in September. 

The initial notion then proved correct when Trump announced a new 10% tariff on $300 billion worth of Chinese imports that were spared from his heavy hand so far. The levies will hit Chinese exporters – and US consumers – on September 1st unless both sides defuse the tensions. Trump has accused China of dragging the talks and breaking its promise to buy agricultural goods. 

Some stock traders suspect that the timing of the move – one day after Powell mentioned trade 26 times – is meant to force the Fed to cut rates. Stock markets have sold off, and money fled into the safety of bonds – which now reflect a high chance of a Fed rate cut in September. USD/JPY has fallen alongside 10-year Treasury yields.

US data has been mixed, with the ADP Non-Farm Payrolls report showing an increase of 156K jobs – above forecasts – while the Core Personal Consumption Expenditure inflation measure disappointed with 1.6% year on year.

The US Non-Farm Payrolls report came out bang on expectations with 164K jobs gained. Wages beat expectations with 0.3% MoM and 3.2% YoY. Other details were mostly upbeat.

See NFP Quick Analysis: Solid data means only Trump can stop the USD rally

The Bank of Japan has left its policy unchanged but strengthened its pledge to do more – if needed – to reach the elusive 2% inflation target. Japanese economic figures were mixed. The unemployment rate dropped to a low of 2.3% while industrial output squeezed by 4.1% – worse than projected.

US events: ISM Non-Manufacturing PMI stands out

Markets will be digesting the momentous Fed decision and the Non-Farm Payrolls early in the week, but the focus will likely shift to the ISM Non-Manufacturing PMI.

The report usually serves as a hint towards the Non-Farm Payrolls, and now it has the chance to stand on its own. The US services sector has been growing at a solid pace according to the forward-looking index which came out at 55.1 points in June – above the 50-point threshold separating growth and contraction. Markit's PMIs will also be of interest.

Late in the week, the Producer Price Index (PPI) figures stand out. They serve as a warm-up to the more-important Consumer Price Index (CPI) in the following week. Core PPI is projected to advance. 

While the next official round of high-level trade talks is scheduled for September, comments regarding relations between the US and China may move markets. These may come from Trump's tweets, interviews by his advisers, and headlines coming out of Beijing. 

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

Japan: Preliminary GDP stands out

The Japanese yen will likely remain the safe-haven currency of choice. If stocks fall on further reactions to the hawkish Fed decision. It is also essential to watch development in the Strait of Hormuz, where tensions between Iran and the West remain elevated. Any flare-up may boost the yen.

The preliminary read of Japanese GDP for the second quarter stands out among macro events. The economy grew by 0.6% in the first quarter and enjoyed a yearly expansion rate of 2.2% back then. Somewhat slower growth can be expected now. The final GDP figures tend to vary considerably from the first read – resulting in cautious trading around the first release.

Here are the events lined up in Japan:

USD/JPY Technical Analysis

The break above the 50-day Simple Moving Average proved insufficient and the downfall more meaningful. Moreover, momentum turned negative, and the Relative Strength Index is also leaning lower but holding above 30 – out of oversold conditions.

Overall, the bias is bearish.

Support awaits at June's low of 106.75 which proved its strength recently. Close by, some support awaits at 106.60 which cushioned the pair in early 2018. 105.50 worked as stubborn support twice last year. The 2019 flash-crash low of 104.65 is next.

On the upside, we find 107.20 as resistance after it worked as support in mid-July. It is followed by 107.50 that was a swing low earlier last month, and by 107.80 which also kept the pair up around the same time. 108.20 was a support line in June, and 108.50 capped USD/JPY in early July. 108.8'0 and 109.00 are next.

USD/JPY Sentiment

While the Fed has been unwilling to commit to further rate cuts and further trade talks are due, the global economy is slowing down – favoring the safe-haven yen over the greenback – and despite the Fed's "favorable outlook." Even with upbeat data, it is hard to see the pair recovering unless trade tensions ease.

The FXStreet Poll shows that experts have lowered their forecasts in response to the recent downfall, but while they are bearish on the short term, they see prices rising in the medium and long terms, with higher targets. They may see the current sell-off as a temporary one.

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