USD/JPY Forecast: Doubts about the Dollar could send it further down, retail sales eyed

Weak US inflation triggers new thinking 

The US Dollar kicked off the week where it ended the previous one, rallying. Fed Chair Jerome Powell confirmed the gradual path of rate hikes. His speech did not reveal any earth-shattering news but coming after the unimpressive Non-Farm Payrolls report; it provided an excuse to buy the US Dollar. Rising US bond yields also supported the greenback/

Things became complicated when US President Donald Trump announced that the US will abandon the Iran deal, officially known as the JCPOA, and will also impose new sanctions on the Middle Eastern country. Exchanges of fire between Israel and Iran over Syria followed. The typical response would be a strengthening of the Yen, the ultimate safe-haven currency, but the reaction was muted. 

The deterioration in the Middle East was countered by further positive developments around North Korea that contributed to a weakening of the Yen. US Secretary of State Mike Pompeo visited Pyongyang and returned with three freed American prisoners. Also, June 12th was set as the date for the Summit between North Korean Leader Kim Jong-un and President Trump in Singapore. The peace process is going on smoothly so far. 

The US JOLTs report showed that the jobs market is healthy while the Producer Price Index fell short of expectations but was ignored by markets. 

And then came the real Dollar disappointment. US core inflation remained unchanged at 2.1% YoY, falling short of expectations for a rise to 2.2%. Core consumer prices also missed on the monthly measure and also headline inflation did not impress. The publication joined the deceleration in US wage growth. The accumulation of not so great data began weighing on the US Dollar, and it lost some ground across the board. The moves against the Japanese Yen were more limited, but the pair failed to breach the round ¥110.00 level.

The impact of the disappointing data was felt for quite some time.

US events: Retail sales 

The main event of the week is the release of the Retail Sales report on Tuesday. The US economy is all about consumption, making this a top-tier figure. Headline sales are expected to advance by 0.5% in April against 0.2% in March while the all-important Control Group (or core of the core) is projected to rise by 0.3% against 0.4% last time. The market will want to see that the economy is growing at a faster pace in the second quarter after relatively slow growth in Q1. 

Housing figures for April are released on Wednesday, and they carry expectations for small changes from the data in March, which was quite upbeat. To have a meaningful reaction in the US Dollar, both Housing Starts and Building Permits would need to surprise in the same direction: either beats or misses on both. Also on Wednesday, Industrial Production could move markets upon a considerable surprise.

Thursday sees the weekly Jobless Claims release which dug the bottom with 211,000 in the past week. The fresh Philly Fed Manufacturing Index for May will provide another insight about the manufacturing sector, on top of the industrial output number on the previous day.

Fed officials will be speaking throughout the week. Mester is a known hawk, so supporting rate hikes will not be a surprise. Bullard and Kashkari are both well-known doves so they may want to rethink rate hikes after the recent weak data. Bostic leans towards the dovish camp. For any of them to move markets, they would have to deviate from their usual stances. An upbeat view by one of the doves could boost the US Dollar.

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

Japan: GDP, Geopolitics, and inflation

There are two noteworthy publications in Japan. The first estimate for GDP growth in the first quarter is expected to show yet another quarter without a contraction in Japan. Single quarters of economic downsizes are relatively common in the Land of the Rising Sun but do not always materialize into an outright recession. 

The second important event is the publication of inflation data late on Thursday. The National figures of inflation for April are expected to show higher headline figures, but the all-important CPI ex-Fresh Food is likely to decelerate from 0.9% in March to 0.8% in April. The 2% goal of the Bank of Japan remains distant. Assuming such depressed levels of inflation, the BOJ is likely to continue its ultra-loose monetary policy for a long time. 

And as always, the Japanse yen remains sensitive to geopolitical developments. A quiet week around Iran and no news from the Korean peninsula could weigh on the Yen, but the nature of such developments is that they consist of surprises. An Iranian revenge against Israel could boost the Japanese currency.

Here are the events lined up in Japan: 

USD/JPY Technical Analysis: Even Steven

The USD/JPY is trading in a range. The broader range is ¥108.60 to ¥110.00, but this range has narrowed, and upside Momentum has significantly dropped. The RSI is still above 50 and below 70, indicating a potential for further gains. On the other hand, the pair is trading below the 200-day Simple Moving Average and this is a bearish sign. 

All in all, the bulls have lost momentum.

The ¥109.50 level capped the pair in late April and defends the round ¥110.00 level. The round level is not only of psychological importance but also capped the pair twice very recently. Also, the 200-day SMA is close by around ¥110.15. The combination of a round number, the 200-day SMA, and a double-top is potent.

Further above, ¥110.50 capped the pair early in the year.

On the downside, ¥108.60 was a low point in early May. Lower, ¥107.90 was a double-top last seen in April, and the round number of ¥107.00 capped the pair in March.

What's next for USD/JPY?

What cannot go up, may come down. The double failure to break ¥110.00 is a result of weak US data and profit taking. The pair could fall from here as the greenback continues its journey to the downside and even if the Korean and Iranian stories stay calm.

The FXStreet FX Poll shows a bullish sentiment, contrary to the doubts expressed here.

US inflation analysis: Final nail in the Dollar rally coffin?