USD/JPY: Bulls take back control on US data, but geopolitical risks remain

USD/JPY was choppy either side of 106.00 overnight but has a downside tendency in Tokyo as bears look for a break below the 50% retracement of the recent lows to recently scored highs that fell just a few pips of 107 the figure. the mood overnight was somewhat more bullish for the Dollar which benefitted from a sharp upside surprise in the retail sales data.

The July retail sales climbed +0.7% MoM vs an estimate of +0.3% and +1.0% MoM for the core control group (est. +0.4%). Meanwhile, the US July industrial production was not so good, but was largely ignored although it slipped -0.2% MoM against estimates of +0.1% MoM. An additional boost for the Dollar came in the Atlanta Fed raising its Q3 GDPNow forecast from 1.85% to 2.16% annualised pace. However, US yields continued to fall.

US 2-year treasury yields dropped from 1.58% to 1.46% which was the lowest since 2017 while the 10-year yield fell from 1.59% to 1.47% which was the lowest since 2016. On the longer end of the curve, the 30-year fell from 2.02% to 1.91% - which was yet another record low. Analysts at Westpac noted that markets are "pricing 34bp of easing at the 19 September Fed meeting, and a terminal rate of 0.97% (Fed funds rate currently 2.13%)." In recent trade, the Japan 10-year yield fell to its lowest since 2016. 

On the geopolitical front, the Chinese came back with some comments which upset the markets, stating that the US had violated prior consensus and that China would take countermeasures on US. Meanwhile, there was some talk over the European Central Bank which weighed on the euro and helped to lift the Dollar, like a shot in the arm. ECB’s Rehn (Finland) said in an interview with DJ/WSJ that they were preparing for substantial stimulus in September. 

Looking ahead

Trade wars are not anywhere close to a resolution. China is not backing down, Trump is not about to lose face over the situation and US stocks are unlikely to find bullish traction in such an environment, until, of course, the US is seen as the cleanest of dirty shirts. For the time being, the Yen can continue to attract a bid on risk-off flows although with risk events such as the Jackson Hole and the Federal Open Market Committee's minutes lined up for the week ahead, the Dollar will be a major focus:

"Recent escalation in US/China trade talks and the tightening in financial conditions have placed the Fed in a tight spot. With its reaction function closely tied to global "crosscurrents", we expect communication though the Minutes and J. Hole symposium to attempt to clarify the path forward. While Fedspeak should support near-term easing, the market is more than priced for it,"

analysts at TD Securities explained. 

USD/JPY levels

Valeria Bednarik, the Chief Analyst at FXStreet, explained that low volumes at the beginning of the European session pushed the pair up to 106.77 although it quickly retreated:

"Now trading around 106.00, the pair has a limited upward potential according to intraday technical readings. In the 4 hours chart, the pair is battling with its 20 SMA, while technical indicators turned lower, although lacking strength, the Momentum above its 100 level but the RSI currently at 48. Still below bearish 100 and 200 SMA, the pair has managed to hold above the 20 SMA throughout the day, so it would take a break below 105.50, a strong static support level, to confirm a bearish extension ahead."