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USD/JPY Consolidating in the Calm Before the US-China Talk and FOMC Storm

For once, the weekend brought little in the way market-moving economic developments, and with Australian traders out on holiday, the FX market has seen a quiet start to the week.

However, this proverbial “calm before the storm” is unlikely to last long given this week’s busy economic calendar. Later in the week, traders will be bombarded by headlines from Wednesday’s Federal Reserve meeting and the always-impactful Non-Farm Payrolls report on Friday, but the first major development to watch will be the US-China trade negotiations kicking off on Wednesday.

Chinese Vice Premier Liu He will be in Washington this week to speak with his US counterparts, Trade Representative Robert Lighthizer and U.S. Treasury Secretary Steven Mnuchin. With China’s economy showing signs of a major slowdown and US tariffs on Chinese goods set to escalate on March 2nd, the stakes are high. So far, Chinese policymakers have reportedly offered to increase imports from the US in an effort to bring the two countries’ trade balance to zero in six years, but the primary sticking point for President Trump is China’s intellectual property practices.

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As we’ve seen with the ongoing Brexit negotiations and the just-concluded US government shutdown talks, trade negotiations often go down to the wire. Indeed, just last week US Commerce Secretary Wilbur Ross stated that the countries were “miles and miles” from resolving their differences, suggesting that a full resolution in the trade war is unlikely this week.

From a trader’s perspective, a bullish outcome for risk assets would likely consist of an optimistic joint statement and a definitive schedule for future talks in the coming weeks. If the two countries are unable to highlight points of agreement or even agree on a schedule for further negotiations, we could see “safe haven” assets rise on the fear that the US tariffs will soon escalate.

Technical View: USD/JPY

USD/JPY has been a good proxy for FX traders’ sentiment in recent weeks. As fears over the government shutdown, economic slowdown, and ongoing trade war peaked around the New Year, the pair dropped collapsed to test a 2+ year low under 105.00. While sentiment and prices have recovered somewhat since then, USD/JPY has only retraced back to its New Year’s Eve levels.

Over the last week and a half, the pair has been contained to a tight, 80-pip consolidation range between about 109.20 and 110.00. Given this week’s busy economic calendar, USD/JPY is likely to break out of its low-volatility range sooner rather than later.

If traders see a lack of progress out of US-China trade negotiations or a more dovish Federal Reserve, USD/JPY will likely break through support at 109.20, opening the door for a quick move down toward the post-flash-crash low in the 108.00 area. Meanwhile, a more positive outcome from this week’s trade negotiations, or a less-dovish-than-anticipated Federal Reserve meeting, could take USD/JPY through resistance at 110.00 and open the door for move up toward 111.00 or 111.50 in short order.

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