USD/JPY Forecast: Intensifying trade war, US GDP, and end-of-month action to set a new direction

• USD/JPY held its ground in a week that saw a further gradual escalation in trade tensions.
• An update on US GDP, housing data, and the Fed's preferred inflation measure dominate the economic calendar.
• The technical outlook remains bearish for the currency pair.
• Experts are bearish in the short-term and bullish afterward, but targets have been downgraded.

What just happened: The trade war continues

The trade war between the US in China sees few signs of defusion and more signs of escalation. While the US has given Huawei, the Chinese telecom giant a 90-day license after blacklisting it, it is considering blacklisting several surveillance China-based companies. And while Treasury Secretary Steven Mnuchin has suggested a meeting between presidents Trump and Xi could take place in June, he was unable to provide a date for new trade talks. Moreover, the senior official said the administration might move forward with more tariffs on Beijing.

China is not standing still either. President Xi visited a rare earth company, signaling that exports of the essential materials may serve as a bargaining chip. China is the overwhelming provider of these elements, used in mobile phones and other industries. Xi also referred to the trade spat as the "long march," implying China is not ready to surrender.

The ongoing tensions prompted commercial banks to incorporate a prolonged trade war into their forecasts. Goldman Sachs, JP Morgan, and others are now seeing a bleaker picture for the global economy.

And markets did not need banks to tell them things are not going well. The sour mood weighed on stocks and supported the safe-haven Japanese yen.

And while banks contributed to a stronger yen, the central bank pushed the dollar higher. The Federal Reserve's meeting minutes reiterated the patient stance on rates and repeated the "transitory" characterization of inflation. Most importantly, it did not provide any hint of a rate cut, contrary to what bond markets are showing. Several Fed officials have also repeated the wait-and-see approach in speeches.

US data was OK, with sales of existing homes coming at 5.19 million annualized in April, within expectations. 

The Japanese economy grew by 0.5% in the first quarter of the year, better than had been expected. The publication did not have an impact on the yen. 

The yen did enjoy some support by the political turmoil in the UK. PM Theresa May is closer to leaving after her new proposal on the Brexit deal was rejected instantly by both the opposition and members of her Conservative Party. Fears that the UK may opt for a hard exit under a new PM, probably Boris Johnson, had an impact beyond Britain's borders and supported safe-haven currencies. 

US events: US GDP update, housing, and inflation eyed

Trade tensions are set to dominate the upcoming week. Rhetoric from both sides is critical. If the US continues criticizing the behavior of Chinese tech firms, or China remains defiant, markets will struggle, and USD/JPY will likely remain pressured.

On the other hand, if the world's largest economies refrain from such rhetoric and announce new trade talks, stocks may rise, and so can the currency pair. 

Apart from the trade spat, there are quite a few new figures after the long Memorial Day weekend. Tuesday features the S&P Case Shiller housing number and the Conference Board's consumer confidence number for May, which will likely remain robust. Wednesday's Fed's Beige Book will probably portray a mostly bright picture of the US economy.

The most significant release of the week comes on Thursday with the update on US first-quarter growth. A minor downgrade from 3.2% annualized GDP growth is on the cards. Markets will also want to see the deflator rise. The robust growth level in the initial publication came on top of meager price rises, a worrying sign. A substantial downgrade may weigh on the dollar.

Last but not least, the Fed's preferred measure of inflation is due on Friday. Core PCE dropped to 1.6% year over year in March, the last month of the first quarter. Fed Chair Jerome Powell said that weak inflation is transitory and the data for April is expected to move up, partially justifying his call. Personal spending, personal income, and the final consumer sentiment gauge from the University of Michigan are also of interest.

Friday is not only the end of the week but also the end of the month, which may trigger higher volatility as money managers rush to adjust their portfolios after a turbulent month.

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

Japan: Tokyo inflation data watched

The Japanese yen is set to continue serving as a safe-haven currency that is demand when the mood is soggy. Intensifying trade tensions between the US and China may provoke a further need for the yen. Other geopolitical stories are North Korea and Iran, which have moved to the backburner of late but may return to the spotlight.

There are also several events on the economic calendar. Bank of Japan Governor Haruhiko Kuroda kicks off the week with two speeches. He will likely stress the bank's efforts to push inflation higher, efforts which have not yielded many fruits. 

Later in the week, Japan publishes jobs figures, retail trade numbers, and most importantly, the preliminary inflation data for the Tokyo region. Prices excluding fresh food have risen 1.3% year over year as of April, but are unlikely to move higher now. 

Here are the events lined up in Japan:

USD/JPY Technical Analysis

The daily chart shows a bearish bias on USD/JPY. Momentum is to the downside and the pair trades below the 50, 100, and 200 Simple Moving Averages. The Relative Strength Index is leaning lower but holds above 30 -- the level that indicates oversold conditions.

Support awaits at 109.00, which was the low point so far in May. Further down, 108.50 was a swing low in late January and serves as another support line. Lower, 107.75 and 107.50 were low points early in the year. 

Dollar/yen faces resistance at the round number of 110.00, which also separated ranges several times during this year. 110.55 was a high point in mid-May, and 111.05 was the closing level in early May before the trade war escalated. 111.65 and 112.15 are next.

USD/JPY Sentiment

Unless there is a breakthrough around trade, the safe-haven yen will likely gain. There is more room to the downside than to the upside.

The FXStreet Poll shows experts are bearish in the short term and bullish afterward. Forecasts have been downgraded in all timeframes. Are experts seeing a prolonged trade war?

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