USD/JPY Forecast: The Fed giveth, Trump can taketh away as the wedge closes in
- The USD/JPY was supported in a busy week that saw a historic summit, a hawkish hike, and more.
- A lighter week features a conference with Powell, housing data, and more.
- The technical picture shows a wedge that may trigger higher volatility while sentiment is bullish.
This was the week: a hawkish hike and some optimism
The Trump-Kim Summit resulted in many smiles but few immediate consequences. The world was glued to the screens, and the move only mildly supported the pair on a light risk-on move.
US Core CPI rose to 2.2% in May, as expected. Nevertheless, it provided ammunition for the Fed that finally sees rising prices.
The Federal Reserve made a hawkish hike with 6 significant development. This included indicating two additional walks this year, removing the pledge to maintain accommodative monetary policy, and expressing satisfaction about the economy. Powell's announcement about holding a press conference after every meeting starting in 2019 also helped, but his caution on wages somewhat weighed.
Markets seemed to have been waiting for all the top-tier figures to come out. The US Retail Sales report was excellent, with beats on expectations on top of upward revisions. The rise of 0.5% in the Control Group was the most notable move. The pent-up pressure from the hawkish Fed hike then exploded into a massive US Dollar rally.
Concerns about trade were never too far from the headlines. The G-7 Summit in Quebec ended in acrimony as Trump clashed with Canada's Prime Minister Justin Trudeau over trade. Other countries are also frustrated with US policy. The topic returned toward the end of the week as the US imposed new tariffs on China and prepared more. A retaliation is on the cards.
US events: Powell in a panel, housing data, and more
After the Fed decision, the various members can speak again. Monday features public appearances from outgoing New York Fed President Dudley and his successor Williams. On Tuesday, the US publishes building permits and housing starts, which have been looking quite good lately. Both figures need to move in the same direction in order to see a meaningful reaction.
Fed Chair Jerome Powell will participate in a panel at the ECB's conference in Portugal, alongside his peers from the euro-zone, Japan, and Australia. This could result in an interesting discussion, especially as the various countries are at different stages of the cycle. Any additional optimism by Powell could boost the US Dollar while some caution or a downplay of the dot-plot upgrade could weigh on it.
Thursday and Friday include second-tier indicators such as the Philly Fed Manufacturing Index and Markit's preliminary PMI data. This leaves room for geopolitics.
Here are the top US events as they appear on the forex calendar:
Japan: BOJ Meeting Minutes, Kuroda, and trade
Japan releases its trade balance early in the week and is expected to report a surplus on the Adjusted Merchandise Trade Balance but a deficit in the non-adjusted measure. Both imports and exports carry expectations for robust YoY increases.
Later on, the Bank of Japan releases its meeting minutes. Given the drop in inflation, the minutes may reveal some frustration and an ongoing pledge to continue with the loose monetary policy until core inflation reaches the 2% target.
BOJ Governor Haruhiko Kuroda will participate in the panel mentioned earlier. As he has frequent public appearances, it is hard to see what else he can add to the discussion only five days after keeping the policy unchanged. Nevertheless, he may provide surprises.
As usual, Japanese events have a limited effect on the currency, but geopolitics certainly do with the Yen's role as a safe haven currency. As the dust settles from the Kim-Trump Summit, some of the world's interest has moved on, but the parties continue talking about the details. Any deterioration in relations or disagreements about denuclearization could boost the currency.
The more substantial theme is the fate of global trade. The US continues picking battles with allies and foes alike. China returns to the limelight with fresh US tariffs, retaliatory measures, and further actions from the US. NAFTA issues and EU tariffs may also come into play. A risk-off atmosphere related to trade will boost the pair while softer positions could boost it.
Here are the events lined up in Japan:
USD/JPY Technical Analysis - Watch the wedge
The pair is trading in a narrowing wedge or triangle. It challenged downtrend resistance recently and fell back in line. Uptrend support is steeper and will soon come into play. The USD/JPY will need to pick a direction before the lines meet at around 110.50.
110.50 capped the pair on its way up and also played a role early in the week. 110.90 is emerging as a double double-top. Further above, 111.40 was the high point in May. Even higher, the round level of 112.00 is notable.
110.00 remains three due to its psychological nature. It also capped the pair in the past. Lower, 109.50 served as support earlier in June. 109.20 was a stepping stone on the way up during June. Lower, 108.60 was a low point in early May. The last line to watch is 108.10, where the uptrend support line began.
Momentum remains moderately positive, and the RSI is above 50, both positive signs. The pair is only marginally above the 200-day Simple Moving Average.
All in all, the technical picture is slightly positive, and the wedge could prove decisive.
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What's next for USD/JPY?
The US Dollar rightfully enjoys the back wind of impressive economic data and a clear-cut hawkish hike by the Fed. However, Trump's trade wars are far from being priced in. When markets get to grips with this reality, the pair could dive.
The FXStreet FX Poll shows bullish expectations in all time frames, contrary to the sentiment expressed here. For the short term and medium terms, we see expectations turning higher, while things are more stable in the longer term.
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Author
Yohay Elam
FXStreet
Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.
