USD/JPY Forecast: Stability likely a calm before the storm, inflation eyed now

• The USD/JPY was very stable amid a flurry of data and news.
• US inflation stands, consumer sentiment and trade issues stand out.
• The technical picture remains upbeat, but momentum is lacking. The FX Poll of experts shows a slightly bullish bias.

This was the week: Big events, small movements

It became official: the US imposed tariffs on China, and the latter responded. The event was fully expected by the markets and was weathered quite well. German Chancellor Angela Merkel's willingness to reduce car tariffs in the EU also had a soothing effect that allowed some stability.

The FOMC Meeting Minutes maintained the bullish view of the US economy, in line with Fed Chair Jerome Powell's word at that rate hike, which saw a hawkish hike. However, the document expressed graver concern about the implications of trade wars on the economy, a significant dovish twist in the Fed's message. The US Dollar remained stable.

US data came out mostly above expectations with both forward-looking purchasing managers' indices showing an accelerated level of growth. Factory orders also exceeded expectations with +0.4%, and ADP missed, albeit with an upward revision. 

The Non-Farm Payrolls came out slightly better than expected on the headline: 213K and with upwards revisions. However, wages disappointed with 0.2% MoM and 2.7% YoY. 

Concerns about the total collapse of the Iran deal were brushed aside, and talks with North Korea were sidelined by other news. 

In Japan, the Tankan surveys came out at 21 points, a mixed outcome that had a limited effect on the yen.

US events: Inflation and consumer sentiment

US consumer credit is the first notable figure, but the real action begins on Wednesday with the Producer Price Index. Core factory gate prices have been rising above 2% and may further accelerate. The publication serves as a warm-up Thursday's big event.

The Fed has two mandates: employment, and inflation. After we received updated information on jobs, the fresh inflation report for June will provide critical data for the central bank and the US Dollar. The Core Consumer Price Index matters more than the headline and acceleration from 2.2% to 2.3% is on the cards. Any increase in prices will increase the odds of a rate hike while a miss may dampen expectations. In case there are no surprises, monthly Core CPI, and the headline figures will have their say.

The last word of the week belongs to the University of Michigan's preliminary Consumer Sentiment for July. Better sentiment implies a higher volume of retail sales. The figure has been stable of late around the 98 handle.

All in all, there are fewer events than in the previous week, but they are quite significant. 

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

Japan: The market mood matters

Japanese Machinery Orders are notable early in the week, and they are expected to continue rising alongside the broader economy. Foreign investments in stocks and bonds will also be watched.

Yet as always with Japan, economic indicators play second fiddle to broader market topics, as the Yen serves as a safe-haven currency. Any further deterioration on trade can boost the Japanese currency while a relief will weigh on it. The pair tends to track stock markets, especially when volatility is high.

Another theme to watch out for is North Korea. After the celebrated Kim-Trump Summit, negotiations have been going on at a snail's pace. The visit of US Secretary of State Mike Pompeo to Pyongyang may yield market-moving headlines, and so can following negotiations. There have been reports that North Korea has been beefing up its nuclear testing facilities despite the peace process.

The fate of the JCPOA, the Iran deal that the US has recently abandoned, may also impact the Yen. There is a high probability that the remaining parties will continue with the agreement, but any deterioration can lift the yen.

Here are the events lined up in Japan: 

USD/JPY Technical Analysis 

The pair maintains a minor bullish bias. The Relative Strength Index (RSI) on the daily chart is above 50 and Momentum is positive. The USD/JPY also trades above the 50-day and 200-day Simple Moving Average, another positive sign. 

110.75 capped the pair in early July and also in mid-June. Further above, 111.15 was a high point in early July. It is followed by 111.40, the peak is seen in early May. Even higher, 112.20 had a role when the pair traded on higher ground.

Looking down, 110.25 was the low point in early July, and this level nearly coincides with the 200-day SMA. The round number of 110 is of psychological importance and also almost meets the 50-day SMA. Lower, 109.30 was the low point towards the end of June, 108.75 provided support in early May, and the 108.10 is the most vigorous defense on the downside after cushioning a fall back late May.

 

USD/JPY Sentiment

The FXStreet forex poll of experts shows a bullish tendency for all time-frames, but the targets set for the pair are quite limited. It seems that many experts are skeptical about the pair's ability to break new ground in either direction. Will we see a calm after the storm?

What's next for USD/JPY?

The pair has been quite quiet and ignoring the trade wars. Can this last for much longer? A lot depends on the data. If the data beat expectations and the Fed continues hiking, markets could suffer and the yen could rise, contrary to intuition. Further escalation in US-Sino relations cannot be ignored for much longer. All in all, it is hard to see the pair extending its gains, and it may eventually turn south.

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