USD/JPY Forecast: US GDP and a rate decision from Japan promise action

This week in USD/JPY: Trade hopes boosted the pair

Jerome Powell, Chairman of the Federal Reserve, has doubled down on dovish comments regarding his triggers for changing interest rates. He seems skeptical about inflation – which remained stable in November with Core Consumer Prices remaining steady at 2.3% yearly. 

Powell first wants to see prices rising significantly and persistently before hiking. On the other hand, an outlook that shows deteriorating future economic conditions would be sufficient to cut borrowing costs. This asymmetry means the Fed Chair tends to lower rates – a dovish bias. 

Powell made similar comments in October, but the reaction was muted. By reaffirming this stance, the world's most powerful central bank sent stocks higher and the dollar lower, as markets expect a rate cut despite the Fed signaling a long pause. After three consecutive cuts, the bank left rates unchanged, and the dot-plot foresees no changes to policy throughout 2020.

However, USD/JPY has remained confined to familiar ranges, finally soaring on trade war-related headlines.US President Trump tweeted Thursday that a “big deal” was very “close.” News agencies later reported that the trade deal was done, and only needed Trump’s signature, sending the pair to the 109.50 region. The pair further advanced with the outcome of the UK election, as Boris Jonhson's victory spurred risk appetite. The USD/JPY  pair neared December high at 109.72 before correcting lower, as hopes cooled a bit with Chinese authorities announcing a deal is not yet done. Hopes prevail although it will depend on whatever these countries say next, and if the US would snap more tariffs on China during the weekend, or not.   

In Japan, the final read of Gross Domestic Product surprised with an increase to 0.4% quarterly growth in the third quarter, better than initially reported. 

US events: US GDP, additional trade headlines

The economic calendar is packed with indicators in the last full week of the year. Markit's preliminary Purchasing Managers' Indexes stand out early in the week. Contrary to the ISM PMIs, Markit's figures have shown that both the manufacturing and services sectors are growing at a slow pace. 

Housing figures have been on the rise in recent months, and Tuesday's Building Permits and Housing Starts for November are projected to show a consolidation at higher levels. Thursday's Existing Home Sales data is also expected to reflect stability. The industrial output may rebound after a significant 0.8% drop in October. 

The best is kept for last with the final read of third-quarter Gross Domestic Product on Friday. The second read of third-quarter GDP surprised with an upward revision to 2.1%, and that estimate may be confirmed now. Apart from the headline, investors will examine the composition of growth – how dependent the US economy is on the consumer, and if the investment is recovering. 

The University of Michigan's final Consumer Sentiment Index read for December will have the last word of the week, as some traders take a weeklong Christmas holiday.

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

Japan: Decision time for the BOJ

The Japanese yen moves primarily on global market sentiment – which is mostly driven by trade talks. Other geopolitical issues, such as North Korea's escalating rhetoric, are also eyed. 

However, the upcoming week features a top-tier Japanese event that may also trigger yen volatility. The Bank of Japan is set to leave the interest rate unchanged at -0.1% once again, but perhaps hint new stimulus in 2020. The Tokyo-based institution wants to push meager inflation higher but is wary of cutting rates further in negative territory – hurting commercial bank's profits. 

Inflation figures for November will follow the BOJ's decision, but they are likely to be shrugged off by markets that already have the Tokyo region's statistics for last month. 

Here are the events lined up in Japan:

USD/JPY Technical Analysis

Dollar/yen is holding near its December high, which is also a six-month high. That said, a break through the high will put the 110.00 figure in the bullet’s eye.

Weekly basis, the pair is just a handful of pips below the 100 and 200 SMA, both converging in the 109.80 region. Technical indicators continue to lack directional strength but holding within familiar levels above their midlines.

The daily chart shows that the pair conquered the 20 and 200 DMA both around 109.00, proving support. The Momentum and the Relative Strength Index are at fresh multi-week highs, but the strength upward is limited.

Resistance awaits at the December high of 109.75 ahead of the critical 110.00 figure. Next, we find 110.65, held the pair down in May, and it is followed by 111.05, also from the same period. 111.65 and 112.45 are next.

Support comes at 109.00, followed by this month's low at 108.39. It seems unlikely that the pair could break below this last, unless the trade war gets a turn to the worst, in which case, the next bearish target comes at 107.75, a swing low from October, and then by 107, which provided support in September and capped it in August. 106.50, 105.75, and 105.05 are next.

USD/JPY sentiment poll

The FXStreet Forecast Poll indicates that the market is seeing the USD/JPY extending its advance within range. Bulls took over the weekly perspective, currently at 77%, leading also in the monthly view, although decreasing to 41.%. Bears take the lead in the quarterly view, with 40%. In the three cases, however, the pair is seen above 109.00 on average.

 The Overview chart shows that the bullish momentum is building up, as the moving averages resumed their advances, heading firmly north. In the monthly and quarterly perspectives, both are standing at multi-month highs, confirming higher highs are likely in the days to come. Those betting for a bearish case in the longer run are fewer, although their targets lower, weighing on the average.

Related Forecasts:

 EUR/USD Forecast: Uncertainty clearing, volatility returning?