USD/JPY Weekly Forecast: Markets demur awaiting central bank action

• Japan Prime Minister Suga declines to run in the fall election.
• Covid emergency in Tokyo and elsewhere extended to the end of September.
• USD/JPY stays in a tight range around 110.00.
• FXStreet Forecast poll sees minimal upside movement.

The USD/JPY was buffeted by conflicting developments that left the pair unmoved inside the tight one-figure range around 110.00 where it has been since the middle of August. 

After opening on Monday, a US holiday, at 109.72, it touched 110.45 on Wednesday, the highest since August 13, but Thursday’s reversal brought the pair back to close at 109.71. Friday’s slight movement to 109.89 confirmed the stasis.

Stationary US Treasury rates and the fading dollar safety trade were countered by the resignation of unpopular Japanese Prime Minister Yoshihide Suga, weak economic data and an extended pandemic emergency in much of the country. Mr. Suga had replaced Shinzo Abe last year who resigned for health reasons. 

The leadership of the ruling Liberal Democratic Party (LDP) will be decided in an inter-party vote on September 29, with the winner to head the ticket in the fall general election and a likely new government. Three candidates head the LDP competition: Sanae Takaichi, a former communications minister and the first woman to vie for the leadership post; former foreign minister Fumio Kishida who came in second to Abe in a party leadership vote last year; and current vaccination minister Taro Kono who has also served as foreign and defense minister.   

Whoever is chosen, an economic stimulus package for the pandemic-bedraggled Japanese economy is sure to be enacted by the new administration. Its deficit spending will add to yen weakness, depending on size.  

Japanese statistics portrayed an economy suffering from the pandemic resurgence. 

Overall Household Spending in July at 0.7% was just a quarter of the 2.9% forecast, after falling 5.1% in June. The Leading and Coincident Indexes for July missed expectations and were lower than June. Gross Domestic Product was slightly better than anticipated in the second quarter but is expected to fall sharply in the third. 

Finally, the Eco Watchers Survey which tracks regional economic trends, fell steeply in August in its Outlook and Current manifestations.

American statistics was divided incongruously between plunging consumer sentiment figures and strong jobs data.The IBD/TIPP Economic Optimism Survey dropped into contraction in August while the labor market registered a record number of open positions for the fifth month in a row in July and Initial Jobless claims dropped to their lowest level of the pandemic. 

Consumer pessimism is a function of inflation, which has seen a rapid rise this year. The Producer Price Index for August continued its ascent, ensuring that consumer prices will continue their disturbing run higher. 

Treasury rates were essentially flat on the week with the 10-year gaining less than a point to 1.326% and the 2-year adding 1 point to 0.219%.

Even ECB President Christine Lagarde’s relatively optimistic take on the continent’s recovery in her post-rate decision press conference on Thursday did little to bolster the euro or sink the dollar. Federal Reserve Chair Jerome Powell saw a similar blase market response to his August taper promise.

Markets have had enough of rhetoric and conjecture, they await action.

USD/JPY outlook

The USD/JPY is dependent on the evolution of Federal Reserve policy.

Economic information, whether good, bad or indifferent, has been unable to move the dollar in the past two months. The Fed’s September 21-22 Federal Open Market Committee meeting is the next signpost on the path to a new rate policy. In late August, Mr. Powell averred that a reduction in bond purchases was very likely before the end of the year. But August Nonfarm Payrolls released on September 3 at 235,000 missed expectations by more than half a million and may have dealt a fatal blow to a taper announcement this month. 

In Japan, Imports and Exports and the Merchandise Trade Balance should rise sharply in August but this is primarily due to the base effect from 2020 and will have no currency impact.

Given the lack of a fundamental trend, technical impediments and support will play an outsized role in determining trading levels and movement. 

Consumer prices and Retail Sales for August have the center stage in the US. Inflation is a major factor in the drop in consumer sentiment and its impact on sales after July's unexpected decline will be closely watched. 

Until markets have a clearer picture of the Fed’s intention for the bond program, the dollar in general and the USD/JPY in particular will be unable to develop any substantial trend.  

Look for a continuation of the 109.50-110.50 range of the last three weeks, with potential weakness to 109.00. 

Japan statistics September 6–September 10

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US statistics September 6–September 10

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Japan statistics September 13–September 17

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US statistics September 13–September 17

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USD/JPY technical outlook

Declining momentum and neutral positioning are the hallmarks of this week's action. The MACD (Momentum Average Convergence Divergence) is nearly flat as is the Relative Strength Index (RSI). True Range closed on Friday at its lowest point of the week. The bare change from open to close for the USD/JPY is the reason for the technical neutrality.

The cluster of three moving averages within ten points of the market is unusual and a clear indicator of the USD/JPY's minimal momentum. The 50-day moving average (MA) at 109.97 is moderate resistance. The 21-day MA at 109.84 and the 100-day MA at 109.80 are the most evanescent support. The 200-day MA at 107.96 harks back to the spring ascent. 

Resistance: 110.00, 110.25, 110.50, 110.75, 111.00

Support: 109.70, 109.50, 109.25, 109.05, 108.90, 108.75

FXStreet Forecast Poll

The FXStreet Forecast Poll reflects the positive but weak directional sentiment in the market.