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  • USD/JPY pair closed Friday with a daily doji playing out ahead of trade talks and the Fed.  
  • Former highs and a critical Fibonacci level at around 108.40 provide  immediate support.

USD/JPY has started out on the backfoot in Tokyo today, testing the 50-day moving average and falling just shy of the 109 handle and stop territory. The question from here is whether the market will test the 109 handle ahead of the Fed or remain on a cautionary foot due to the trade talks that are due to get underway at the start of this week in Shanghai?

The argument for a bullish scenario is that the market got too carried away with the expectations of a new easy money cycle at the Federal Reserve, while, on the flip side, should the Fed cut interest rates and signal more along the way, coupled with a deadlocked trade negotiation, the Yen would likely attract flows away from the Greenback.  

“We expect the FOMC to deliver its first rate cut in over ten years, with a  25bp reduction in the Fed Funds target range. Given crosscurrents persist as a threat for the outlook and inflation remains subdued, we look for the Fed to leave the door open to further easing. We expect the statement to show modest, mark-to-market changes and for two of the FOMC voters to dissent,” analysts at TD Securities explained.    

The Dollar picked up a bid last week on Friday following the U.S. Gross Domestic Product, (GDP), which beat expectations.  Consequently, the DXY jumped to the 98 handle and closed up 0.2% on the day. Equally, U.S. 2-year treasury yields initially rose from 1.85% to 1.88% following the data and 10-year yields moved between 2.06% and 2.10% while markets price in 28bp of easing at the Federal Reserve this week. However, U.S. benchmarks  printed record closing highs in the S&P 500 and Nasdaq which helped USD/JPY to a fresh high with its recent run from the 107.30s on Friday.  

For the immediate sessions ahead, the Sino/US trade talks will be a focus in the media and headlines could be flowing. However, there appears to be an air of pessimism surrounding the event while will likely contribute to a higher yen.  

“People close to the talks say a major breakthrough is unlikely on points that led to negotiations breaking down in early May. That includes the U.S. insistence that China commit to legal changes to protect intellectual property and abandon state…”

– Wall Street Journal wrote on the weekend.  

USD/JPY levels

Valeria Bednarik, the Chief Analyst at FXStreet, explained the  USD/JPY pair closed Friday with a doji:

“In the daily chart, the pair offers a neutral-to-positive stance, as it settled above a directionless 20 DMA but holds well below bearish 100 and 200 SMA. Technical indicators in the mentioned chart lack directional strength around their midlines. For the short-term, and according to the 4 hours chart, the pair has chances of testing the said figure, as it holds above all of its moving averages and with the 20 SMA advancing above the larger ones. Technical indicators lack directional strength but stay near overbought readings.  Former highs and a critical Fibonacci level at around 108.40 provide an immediate support, with the upward potential to remain in place as long as the pair holds above it.”