Dollar/yen recorded sharp gains for a third successive week. The pair gained over 1.0% last week, punching past the 108-level. Will the dollar’s impressive rally continue this week? Investors will be keeping a close eye on central banks, as the Federal Reserve and the BoJ will both hold policy meetings.

USD/JPY fundamental movers

There are growing fears that Japan is headed for a recession. Japan’s GDP in Q2 posted a weak gain of 0.3%, down from 0.4% in the initial estimate. On an annualized basis, GDP was revised lower to 1.3%, well below the initial estimate of 1.8%.The government is expected to implement a new sales tax in October, which could dampen growth and even push the weak economy into recession.

Over in the U.S., consumer inflation reports were a mixed bag. CPI slipped to 0.3%, down from 0.1%, but this matched the estimate. Core CPI remained steady at 0.3%, edging above the forecast of 0.2%. The week wrapped up with retail sales, which slowed considerably in August. Retail sales fell to 0.4%, down from 0.7% a month earlier. Core retail sales slowed to zero, compared to 1.0% in the previous release. It was the first time that core retail sales failed to record gains since March. The UoM Consumer Sentiment ticked lower to 92.0, easily beating the forecast of 90.4.

See all the main events in the Forex Weekly Outlook

USD/JPY Technical Analysis

We start with 109.73, which has held in resistance since the end of May. 109.35 is close by.

108.70 follows.

108.10 was a swing low in late May.

107.30 has held in resistance since the first week in August.

106.61(mentioned last week) remains relevant. It is providing immediate support.

105.55 has held in suport since late August.

104.65 has held firm since the first week of January. It is the final support line for now.

USD/JPY Daily Chart

USD/JPY Sentiment

I am neutral on USD/JPY

The dollar is enjoying a strong run, and the message from the Federal Reserve this week could have a major impact on whether the rally continues. With the Japanese economy not in the best of shape, investors will also sensitive to the message from the Bank of Japan.