USD/JPY Forecast: Overbought, so what? US GDP the key

• The USD/JPY extended its gradual gains and reached a new yearly high.
• The first read of Q2 GDP, durables, and home sales stand out.
• USD/JPY bulls not ready to give up, at least for this month. Chances of higher highs, however, shrunk. 

This was the week: Powell pushes the USD forward

Powell-power: The Chair of the Federal Reserve went to Capitol Hill and had a clear message: the economy is doing well, and the Fed is set to continue raising interest rates. He said that Q2 growth is projected to be more robust than Q1, that the healthy job market is drawing more people in, that inflation, already rising, is set to sustain its target, and that wages are growing at a faster pace than one year ago. His hawkish tone sent the US Dollar higher. 

On the sensitive topic of trade, Powell tried to tip-toe and refrained from politics. Nevertheless, responding to questions, the Chair did say lower tariffs are better than higher ones. Warnings from the IMF, the World Bank, and others all kept the trade topic in the headlines.

On the trade front, China and the US had a hostile exchange of blames. Negotiations between the world's two largest economies have gone nowhere fast. The US is still on course to impose a 10% tariffs on $200 billion worth of Chinese goods. 

As in the previous week, trade tensions have been beneficial to the US Dollar, helping it not only against the weaker commodity currencies but also vis a vis the Japanese Yen. 

US President Donald Trump did not contribute too much to trade wars in the past week but surprised by directly talking about monetary policy. In an interview to CNBC, Trump complained that the Fed's rate hikes are impeding growth and said he preferred lower rates. He also expressed his desire for a weaker US Dollar to keep the US competitive.

The greenback quickly responded with a sharp drop, but the move may be short-lived. 

US Retail Sales were OK, with figures mostly meeting expectations and some upward revisions. The closely watched meeting between US President Donald Trump and his Russian counterpart Vladimir Putin created controversies but no market movement. 

The USD/JPY advanced gradually, making it to new 6-month highs above 113.000

US events: US Advance GDP, Durable Goods Orders

The week begins with the publication of Existing Home Sales on Monday. Most transactions are of second-hand homes. These stood at a satisfactory level of 5.43 annualized in May. On Tuesday, the US publishes the Housing Price Index for May, and Markit releases its early estimates for the services PMI, which is projected to remain elevated.

Wednesday sees New Home Sales, where there are far fewer transactions, but each one generates more significant economic activity such as essential infrastructure. A high annualized level of 689K was recorded in May. 

Durable goods orders, due on Thursday, are already considerably more important. Both headline and core figures dropped in May and carry expectations for an increase in June. Sales of durable goods represent the investment in the economy, are eyed by the Fed and feed into the GDP read. So, the publication serves as a warm-up to Friday's important announcement.

The US is expected to report much better GDP growth in the second quarter of the year after a relatively slow Q1. There is a broad consensus about it. But is it really that great? The first publication is a relatively rough estimate but tends to have the broadest impact on prices. An annualized growth rate of over 4% would thrill markets, while a failure to top 3% would be a considerable shortfall. 

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

Japan: Tokyo CPI eyed, safe-haven status gone

The primary publication on the Japanese calendar comes from the capital region. The Tokyo CPI is for the current month of July, making it fresh. The Tokyo CPI ex-Fresh Food is the most important figure. It reached 0.7% in June, beating expectations yet far from the 2% target stated by the Bank of Japan. A setback would imply no letting up from the BOJ on its extremely loose policy. 

Until not so long ago, the Japanese Yen served as the ultimate safe-haven currency but lost its role, succumbing to the US Dollar. Will it return at any point? A fall of stock markets will test the new dynamics. Any bad news regarding North Korea that traditionally boosted the Yen could also be of interest. 

Here are the events lined up in Japan: 

USD/JPY Technical Analysis - just around the overbought territory

The Relative Strength Index shows that the pair is only around 70 which is the overbought territory. It is flirting with the level in the past few days. However, Momentum remains upbeat, and the 50-day Simple Moving Average has crossed the 200-day SMA to the upside, a bullish sign. 

Looking up, 113.15 capped the pair on July 18th and 19th and served as resistance. 113.40 held the pair down in early January, and 113.75 already dates back to December 2017. Further down, 114.75 is another level seen back in 2017.

Looking down, 112.25 provided on July 19th. Lower, 111.40 was a high point in May, and it is closely followed by 111.20 which was a peak on July 2nd. Further down the line, 110.75 was a peak on June 21st. 

 

USD/JPY Sentiment

The pair slowed down but continued moving higher. Further advances seem unsustainable at the moment and may be limited. Any substantial stock market reaction to tighter monetary conditions and trade wars could turn the neutral sentiment into a negative one.

The FXStreet forex poll of experts provides further insights. Despite the latest slump, sentiment toward the USD/JPY is bullish, with the pair seen up weekly and monthly basis, but easing in the longer term perspective. For the first two time frames under study, the number of bulls account for the 50% of the polled experts, which in average target levels above the 112.00 figure. Sentiment turns bearish in the longer perspective, with bears at 53%  from 62% in the previous week, but in both cases targeting 111.28. The overview chart shows that in the 3-month view, the range of possible targets is quite wide, signaling persistent uncertainty over the USD future. 

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