USD/JPY Forecast: Trump tweeted the pair down, consumer in focus now
- USD/JPY has dropped sharply as the mood around trade talks deteriorated.
- The upcoming week features US retail sales and consumer sentiment apart from trade.
- The technical outlook has become bearish for the currency pair. Experts have downgraded their targets.
What just happened: Trade wars boost the yen
The US and China seemed to be on the brink of a broad trade agreement, but to quote Trump, "China broke the deal." The world's second-largest economy reportedly backtracked on commitments related to intellectual property and forced transfer of technology, triggering angry tweets from the US president over the previous weekend. Fears about the feasibility of an accord and new tariffs dampened the market mood and triggered safe-haven flows into the yen.
The US then went forward with raising the duties on $200 billion worth of Chinese imports from 10% to 25%, but the market reaction was relatively muted. Why? The new levies will not apply to Chinese goods already making their way to the US, only to ones that have departed after the announcement. Moreover, negotiations continue, and at the time of writing, the Chinese delegation has not left Washington.
Another source of safe-haven flows into the yen comes from growing tensions between the US and Iran. The administration slapped the Islamic Republic with new sanctions on metal imports and has sent reinforcements to the Persian Gulf. At the moment, oil prices remain restrained.
The third source of geopolitical concern comes from Japan's neighbor, North Korea. The rogue nation fired another missile in what seems like a gradual escalation of the situation.
US data was OK with the trade balance deficit narrowing more than had been expected. Jobless claims remained elevated, albeit not so far from historic lows. And finally, core inflation met expectations with a rise to 2.1% on an annual basis, but other figures missed expectations.
See The data is good enough for Powell
US events: Consumer in the limelight
Trade tensions will likely remain the dominating theme in markets. While both parties continue negotiating at different levels, the atmosphere has materially changed. With every day that passes without a deal, the mood may continue souring, boosting the yen. As Chinese exporters and US consumers begin feeling the new tariffs, the prospects for the global economy will continue deteriorating.
If stocks fall sharply, Trump may be urged to compromise and perhaps settle for a more limited agreement rather than the grand bargain he was aiming at. If what we are seeing now is the crunch before the smiles at the signing ceremony, markets could jump and so can USD/JPY.
Moving to data, after we learned about the rise in consumer prices, the retail sales report for April will shed some light on how much money consumers spent last month. Expectations stand on modest gains of 0.2% on the headline and 0.4% in the all-important control group. These projected advances in April came after excellent figures for March when all the indicators jumped by 1% or more.
The US publishes building permits and housing starts on Thursday. It is quite common to see one of these indicators come out below expectations and the other beat them. However, if both numbers surprise in the same direction, the dollar can move.
A week that begins with the consumer ends with it as well. The University of Michigan's preliminary consumer sentiment index for May is forecast to remain around 97 points, similar to the data seen in April. The survey is seen as a leading indicator of retail sales.
Here are the top US events as they appear on the forex calendar:
Japan: Watch the general sentiment
The Japanese yen is set to move on market sentiment related to trade, with any positive development weighing on the currency and a breakup of talks boosting it higher. The other geopolitical issues mentioned earlier, Iran and North Korea will also have their say if they grab the headlines.
In Japan, the leading economic index and foreign investment data will likely have a short-lived impact.
All in all, the market mood, as reflected in stocks and bond yields, tends to move USD/JPY more than any Japanese economic indicator.
Here are the events lined up in Japan:
USD/JPY Technical Analysis
Dollar/yen convincingly broke below the uptrend that supported it since early January. After trading within the wedge, it finally chose a direction and fell off. On the way down it also fell below the 200-day Simple Moving Average. Momentum remains negative, but the Relative Strength Index dropped below 30, reflecting oversold conditions and indicating a bounce.
All in all, the chart points to a temporary correction before the trend resumes.
The fresh low of 109.45 is the first line of support. It is followed by 108.50 which was a swing low in late January and then by 107.75 which supported the pair in early January. The next line to watch is 106.50.
The round number of 110.00 is the first line of resistance. It was a swing low in March and served as resistance earlier. 111.10 was the weekly close before the gap lower, and 111.40 provided support in late Pairl. 112.15 and 112.40 are next.
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USD/JPY Sentiment
The current tense mood around trade talks could be replaced with some more optimistic talk as negotiations continue, allowing the pair to recover and exit oversold conditions. Looking forward, it is hard to know what Trump and Xi will be up to.
The FXStreet Poll shows a bearish bias in the short term but a bullish one afterward. The recent downfall of the currency pair pushed the targets lower on all timeframes. Trump's tweets affect experts.
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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.
