USD/JPY bulls testing the 21-hr SMA in recovery of opening bearish gap

• USD/JPY bulls testing the 21-hr SMA at 112.48.
• The technical indicators have pulled lower from extreme levels.
• All eyes turning to retail sales for Monday's key event in the US shift. 

USD/JPY has started out the session in the recovery of the NY session lows down at 112.31 and from the bearish opening gap today down at 112.19. The pair has reached a high of 112.49 and is currently looking into the 21-hr SMA at 112.48. 

USD/JPY has been capped at 112.80 by softer US yields with the US 10 year treasury yields falling from 2.86% to 2.83%, and 2yr yields fell from 2.60% to 2.57%. However, the Fed fund futures yields continued to price 1 ½ more hikes in 2018 and the central bank divergence keeps the dollar underpinned creating buying opportunities on the way down.

As for data on Friday,  the US consumer sentiment (University of Michigan) fell from 98.2 to 97.1 in July (vs 98.0 expected) for a six-month low. Inflation expectations dropped, although yields were already on the way down prior to the release. The 1yr ahead measure down from 3.0% to 2.9%, and the 5-10yr ahead measure from 2.6% to 2.4%.

We also had some Fedspeak that came in from Kaplan and Bostic. Firstly, Kaplan was looking for 1-2 more hikes this year but was also concerned about trade. Bostic, on the other hand, did not focus on such headwinds and argued that inflation approaching 2% as a sign of economic health.

We also had the Fed’s Monetary Policy Report, which Chair Powell delivers this week to Senate (Tue) and House (Wed), although containing nothing that we have not got from recent upbeat Fed commentary.

The week ahead

For the week ahead,  domestically, things kick off with US retail sales.  Analysts at Nomura have forecasted a steady 0.4% m-o-m increase in June core (“control”) retail sales after a solid 0.5% m-o-m in May, "consistent with firm momentum in personal spending in Q2".

USD/JPY levels

Valeria Bednarik, chief analyst at FXStreet explained that the technical indicators have pulled lower from extreme levels, but remain within overbought readings, suggesting a possible downward corrective movement ahead, but without confirming it, and without denying the dominant bullish trend:

"In the 4 hours chart, technical indicators also corrected extreme overbought conditions but lost downward strength well above their midlines, as the price remains far above its moving averages, in line with the longer term perspective."