USD/JPY Forecast: Deal or no deal? Fed competes with the trade crunch time

• USD/JPY's advance has reversed amid trade headlines and mixed US data.
• The last Fed decision of the year and the trade deadline dominate markets.
• Mid-December's daily chart is painting a mixed picture.
• The FX Poll is showing a bearish bias in all time frames.

Where is the US economy going? And will the US and China sign a deal, avoiding new tariffs? A tumultuous week has seen twists, turns, and high volatility – but no answers to these questions. The upcoming Fed decision and the tariffs deadline may bost action now.

This week in USD/JPY: Trade whipsaw, disappointing data

The world's largest economies remain close to a deal but are not there yet. White House adviser Kellyanne Conway said that the agreement is being written while others suggested that Washington is on course to slap new tariffs on China on December 15.

President Donald Trump said that he may wait until after the November 2020 Presidential elections for signing a deal, but also praised the progress that has been made.

China was angered by another bill in Congress – this time about human rights violations in its western province of Xinjiang. The legislation follows the Hong Kong Act. On the other hand, it offered an olive branch by exempting duties on buying of US agrifoods. 

Markets have been reacting to headlines, rising with optimism and carrying USD/JPY with them, while dropping in response to pessimism and sending flows toward the safe-haven yen. However, investors may feel some fatigue amid the incessant headlines and the protracted saga.

The US figures have also failed to draw a clear picture, but trading economic releases were more straightforward. Throughout most of the week, American indicators disappointed. ISM's Manufacturing Purchasing Managers' Index showed a deeper contraction in November, while the services sector is growing at a slower pace according to the forward-looking survey. ADP's private-sector jobs report also fell short of expectations. 

The picture changed after the release of the all-important Non-Farm Payrolls – which beat expectations with a leap of 266,000 jobs in November. The gains came on top of upward revisions worth a total of 41,000 additional positions in October and September. However, monthly wage growth fell short of projections with 0.2% and that eroded the dollar's gains.

In Japan, Prime Minister Shinzo Abe introduced a fiscal stimulus package to boost the economy. While unemployment is low, global headwinds may weigh on the world's third-largest economy. The move may ease the pressure from the Bank of Japan to add more stimulus.

US events: Trade, the Fed, and also data

Deal or no deal? If the US and China reach an agreement – at least one providing calm for the near future, markets may cheer and push USD/JPY higher. The minimal accord would include no new tariffs, and China committing to buying more US agrifoods – perhaps a specific amount as Washington wants.

A more ambitious document would include a reduction of previous levies and China pledging to make changes to its intellectual property policies and perhaps other structural issues. In that case, dollar/yen may surge.

However, the probability of a breakup in talks remains elevated. In case the US moves forward with new tariffs, markets may plunge and take USD/JPY with them – even if both sides vow to continue talking. Investors would like to see fewer barriers to global commerce, not new ones. 

The Federal Reserve is set to leave interest rates unchanged after three consecutive cuts. Recent economic figures have been satisfactory, especially in the labor market and with a rebound in investment. On the other hand, inflation remains subdued. 

Consumer Price Index statistics for November are due out just before the publication and may shape last-minute expectations. Core CPI  – the most significant figure – decelerated to 2.3% in October. Any change may move markets. 

Traders who will try to gauge what the Fed intends to do in 2020 and the bank's "dot plot" – forecasts for growth, employment, inflation, and interest rates – will provide some clues. Perhaps more importantly, an understanding of the Fed's reaction function – when it may choose to cut or hike rates – is the key.

Jerome Powell, Chairman of the Federal Reserve, has previously set a higher bar for raising rates than for slashing them. He will hold a press conference after the event and confirmation – or dismissal – of the notion may rock the dollar.

See Fed Preview: Is the bar higher for hiking? Powell's may down the dollar, three things to watch

After the dust settles from the Fed, investors are set to focus on the Retail Sales report due out on Friday. The American consumer has been propping up the economy and is set to continue doing so. Headline sales are projected to rise by 0.4% while the all-important Control Group is forecast to advance by 0.4% in November – the month including Black Friday.

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

Japan: Watch Japanese GDP

The Japanese yen is first and foremost the ultimate safe-haven currency. A breakdown in trade talks may boost the currency. Geopolitical issues may also trigger such flows.

In Japan, the final third-quarter Gross Domestic Product is set to confirm the meager 0.1% growth rate. That may help justify the fiscal stimulus package that Abe is planning. 

Later on, the Tankan survey figures for the fourth quarter may move the yen. The figures for the third-quarter pointed to moderate growth, and they may drop in the upcoming publication. 

Here are the events lined up in Japan:

USD/JPY Technical Analysis

The clouds are darkening over dollar/yen. It has been unable to conquer the 200-day Simple Moving Average and momentum turned negative. However, it continues clinging onto the 50-day SMA and trade above the 100-day one. The failure to recapture the broken uptrend support line continues weighing on it.

Some support awaits at 108.50, where the 50-day SMA meets the price. Further down, 108.20 provided support in mid-November. It is followed by 107.90, which cushioned earlier last month. The round 107 level worked as support in September and it is followed by 106.55 and 105.75.

Resistance awaits at108.95, which held dollar/yen down in early October. Next, 109.35 was a double-top and remains important. The next level to watch is the December peak of 109.70. Next, 111.65, 111.05, and 111.70, and 112.25 await USD/JPY.

USD/JPY Sentiment

The FX Poll is showing that experts are bearish on all time horizons, albeit with all targets stacking close to each other – at the 108 handle. The short term objective has been pushed lower while the long-term one has been upgraded. 

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