USD/JPY Forecast: subdued inflation will leave sentiment as the main motor

• USD/JPY poised to extend its decline, although at a moderate pace in a risk-averse environment.
• Japanese core annual inflation seen up by 0.3% YoY, keeping BOJ's hands tied.

The USD/JPY points to close the week marginally lower, trapped between two fires.  Broad dollar's demand was backed by risk aversion and data backing Fed's hawkish stance. The yen, also seen as a safe-haven, benefited by the sour sentiment triggered by political tensions related to US protectionism measures. The slump of the Turkish Lira last week prompting concerns of contagion as the local economy relies on foreign currency loans, eased at the beginning of this one, on some temporal measures taken by local authorities and headers indicating that Qatar is willing to invest in Turkey up to $15B. Among those measures, Turkey announced it will double tariffs on US goods, and in some cases increase them up to 140%. The battle between Turkey and the US is using the incarceration of an American pastor in the intercontinental country, but inner monetary policies are the main reason behind the collapse of the Lira. Still, is a risk factor that hurts the most other EM and the EU.  Late Thursday, US Treasury Secretary Mnuchin menaced with more sanctions if the pastor is not released, with the Turkish lira back under pressure this Friday.

Another risk-related factor that reached the headers by the end of the week was initially positive, indicating that the US and China will resume trade talks, although news on Friday that the US will work on pressuring China to lift the Yuan, once again triggered a run to safety, although majors' reaction was limited.

Solid earnings reports in the US sent Wall Street sky-rocketing Thursday, which partially offset demand for the safe-haven yen. In the meantime, yields pivoted within familiar levels, with no fireworks there that can affect the pair.

In the data front, Japan offered different figures that suggest inflationary pressures will remain subdued. Industrial Production fell in June, with the annual figure printing -0.9%, better than the market's forecast but still pointing to shrinking activity. The July Merchandise Trade Balance posted a large deficit of ¥231.2B, amid a jump in imports and reduced exports.

Next week, the country will release National July inflation, less relevant that Tokyo one, but still closely watched, as investors long for the BOJ to take some action in monetary policy. July inflation is expected to post a modest advance, still far below the central bank's target, as the annual CPI excluding food and energy prices is seen up 0.3% from the previous 0.2%. Such numbers will keep the massive stimulus program firmly in place. With changes out of the table there, sentiment will keep leading the way for the pair, with risk-averse headers backing modest JPY gains.

USD/JPY technical outlook

The  USD/JPY pair weekly chart shows that it attempted to recover ground above its 100 SMA, broken with the opening, but was unable to do so, with technical indicators extending their declines toward their midline, signaling an increasing downward potential. The mentioned 100 SMA is around 110.60, while the 200 SMA stands at around 113.20, with bears only giving up on a break above it. Given the risk-averse environment, such a rally seems unlikely for the upcoming week.

In the daily chart, the pair has been pressuring a bullish 100 DMA ever since the week started, but so far was unable to clearly break below it, while technical indicators are in bearish mode, the Momentum retreating sharply from its mid-line, but the RSI ranging just above 40, lacking strength.

The key is the weekly low, as once below 110.10, which will also imply the break of the 100 DMA, the pair would have room for a steeper decline towards 109.20/30, where it has several relevant daily lows, ahead of 108.60. The 111.20 level, on the other hand, is the immediate resistance, with gains above it opening doors for an advance up to 112.15, the monthly high. 

 

USD/JPY sentiment poll

The pair is expected to remain under selling pressure next week according to the FXStreet Forecast Poll, with bears up to 72% from 67% in the previous one, and the average target downgraded to 110.06. Bulls, however, dominate the longer perspectives, at 61% monthly basis and at 54% in the three-month view, both in-line with the previous views.  The average target in the longer perspective is barely above the current level, at 111.08, although the overview chart indicates that most targets accumulate some 200 pips higher, at around 113.00, as despite risk sentiment, speculative interest hopes the USD will surge victorious. 

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