USD/JPY Forecast: Buy Trump's trade rumor, sell the fact? Powell's outlook also eyed

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  • USD/JPY has been rising on hopes for a US-Sino agreement.
  • Further trade headlines and Powell’s testimony are set to dominate trading.
  • Mid-November’s daily chart is painting a bullish picture.

How low will tariffs go? The removal of duties has dominated trade headlines – which have triggered high volatility in dollar/yen. Will the greenback continue forward? Top-tier figures and a critical testimony from the head of the central bank are eyed. 

This week in USD/JPY: Dominated by trade

The Chinese economy has been suffering in its trade war with the US and wants all tariffs to be removed. However, Washington wants to use the duties as leverage against Beijing, until a final deal is struck. Have the world’s largest economies reached an agreement? Investors were finding it hard to understand amid contradicting headlines. 

USD/JPY advanced when the Chinese Commerce Ministry said an agreement was reached and when the White House’s Larry Kudlow expressed optimism. The currency pair dropped when Peter Navarro –  a hawkish administration adviser – said that the sides have yet to reach an accord and when reports emerged that an agreement will have to wait until December.

The US and China are also at odds about the venue of the signing ceremony, with President Donald Trump reportedly insisting on Iowa – the state where election primaries begin. 

More US-China trade and the global economy: Q&A with FXStreet senior analyst Joseph Trevisani

US data has been upbeat, pushing dollar/yen higher. ISM Purchasing Managers’ Index for the services sector beat expectations with 54.7 points, indicating that consumers are undeterred by the manufacturing slump. 

The Bank of Japan’s meeting minutes document has repeated the bank’s dovish stance. Governor Haruhiko Kuroda and his colleagues have maintained their pledge to continue with loose monetary policy. 

US events: Trade, Powell, and Retail Sales

Trade-related headlines are set to continue having the most significant impact on trading. Investors are pricing in high chances that the US and China strike a deal. USD/JPY has limited room to rise if Washington and Beijing jointly announce a summit to sign an accord – even if it is limited in scope. President Donald Trump holds the key.

A broad deal that includes substantial tariff reduction is the markets’ preferred outcome. A more modest “Phase One” accord is more likely. 

If talks break down, dollar/yen has considerable room to fall. The prospect of new US levies in December may spook markets and send traders to the safety of the safe-haven yen.

While negotiations are in the driver’s seat, the economic calendar features several high-profile events. Richard Clarida, Vice-Chair of the Federal Reserve, kicks off the week with a speech on Tuesday, but markets will likely await his boss.

Jerome Powell, Chairman of the Fed, is scheduled to testify before Congress on Wednesday and Thursday. His first appearance tends to carry more weight. Powell will likely remain upbeat about employment and consumption but worried about global uncertainty and subdued inflation.

Lawmakers may grill him on the contradiction between cutting interest rates three times and his rosy outlook – and also try to squeeze answers regarding trade policy. Any hint regarding December’s meeting will be closely watched. The bank is set to leave rates unchanged in December according to its guidance and pricing in the bond markets.

Inflation and retail sales

The US releases Consumer Price Index figures just before the Fed publishes Powell’s prepared remarks for his testimony. Despite the bank’s worries, core inflation is set to creep up, reaching 2.5%. Nevertheless, the Washington-based institution first wants to see sustainable high inflation before considering raising rates. A rise to 2.6% may cause some second thoughts in markets.

Investors will have limited time to digest Powell’s testimony, as Retail Sales figures for October are set to provide new insights on the economy’s motor. After mediocre numbers in September, the all-important Control Group – the “core of the core” – is expected to leap by 0.7%. Other measures of sales also carry upbeat expectations. 

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

Japan: Trade, and also GDP

The Japanese yen remains the ultimate safe-haven, leaving gold behind. Recent optimism regarding trade has pushed the yen lower. The topic remains central. Various geopolitical issues may reach center stage. Iran has stepped up its uranium enrichment capabilities while North Korea may conduct further missile tests. Both issues have been on the sidelines but may escalate quickly. 

Among Japanese indicators, preliminary Gross Domestic Product figures for Japan are forecast to show moderation in growth – 0.2% quarterly in the third quarter against 0.3% beforehand. 

Industrial output for September and machinery orders are also of interest. Still, as mentioned earlier, the yen moves more in response to the general market sentiment than to local economic data. 

Here are the events lined up in Japan:

USD/JPY Technical Analysis

Dollar/yen has broken above the 200-day Simple Moving Average – a considerable bullish sign. It has also moved beyond the double-top of 109.30, and above the uptrend resistance line. Moreover, momentum remains to the upside, and the Relative Strength Index remains below 70 – extreme overbought conditions. 

Overall, bulls are in control. 

The next resistance line awaits at 109.90, which capped the pair back in mid-May. It is followed by 110.65, which was a peak around the same time. Next, USD/JPY 110.10 provided support earlier that month and towers over a gap. 110.65 and 112.20 are next.

Support awaits at 109 – a round number – and also a resistance line in early October and the convergence of the 200-day SMA. It is followed by 108.50, which held dollar/yen down twice in September and October. Next, 108.20 served as support in mid-October. Next, we find 107.50, which is where the 100-day SMA meets the price.

USD/JPY Sentiment

Trump seems eager to announce a deal, with the venue being more important than the details. An accord is mostly priced in and could lead to a “buy the rumor, sell the fact” response. On the other hand, the damage to the global economy has been done and may weigh on the currency pair. Overall, there is room to the downside. 

The FX Poll is providing additional insights. 

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