Dollar/yen was unchanged last week, taking a breather after three successive winning sessions. Will the yen’s rally continue? With a lack of key events this week, investors will be keeping a close eye on the U.S. government shutdown and progress in the U.S.-China trade dispute.

USD/JPY fundamental movers

The U.S dollar retreated last week after a surprisingly dovish Fed, but the yen was unable to capitalize, as risk appetite remained fairly strong. This stance was reiterated by the Fed minutes from the December meeting, where policymakers said they would be patient and prudent before any further hikes. This represents a sharp U-turn for the Fed– just a few months ago, there was talk of three or four rate hikes in 2019. Now the Fed is saying it will think long and hard before raising rates, and some analysts have even predicted a rate cut late in the year.

Risk appetite expressed renewed optimism that the global trade war could ease, after talks between U.S. and Chinese officials were extended by a day, and there were reports that the sides made minor progress. The global trade war has rocked equity markets in recent weeks and has been the catalyst behind the yen’s impressive rally.

See all the main events in the Forex Weekly Outlook

USD/JPY Technical Analysis

112.25 provided support in early December and it defends the 112 level.

111.65 was a swing low in October, Close by, 111.40 was another swing low in October.

110.40 is next. Below, 109.70 was a swing low in late August and is protecting the symbolic 110 level.

Close by, 109.35 was a cushion in mid-July. 108.70 was a cushion early in the summer and 108.10 a swing low in late May.

107.50 capped the pair in early April.

105.66 was tested late in the week as the pair dropped sharply.

104.60 is the final level for now.

USD/JPY Daily Chart

USD/JPY Sentiment

I am neutral on USD/JPY.

The safe-haven yen has capitalized on the recent turmoil in the equity markets, but risk appetite appears to have improved. If the U.S government shutdown continues, investors could show less enthusiasm for the U.S. dollar. As well, investors are hopeful that the U.S-China trade war will ease, after the two sides held talks last week. If there is further progress, to report, investors could flock to riskier assets, at the expense of the safe-haven yen.