After the rapid strengthening of the safe-haven currencies in the first half of August, investors prefer to close positions, weighing the risks. On the one hand, the slowdown in global GDP, trade wars and increased volatility of financial markets support the demand for the Japanese yen and the Swiss franc. On the other hand, expectations of a large-scale monetary stimulus from the ECB and the Fed extend a helping hand to global stock indices. In this regard, the week to August 23 may become decisive in the fate of USD/JPY.

The G7 summit, a possible vote of no confidence in Italian Prime Minister Giuseppe Conte, the publication of the minutes of the July FOMC meetings and the ECB Governing Council, the White House verdict on Huawei, as well as the speech of Jerome Powell in Jackson hole – the five-day period promises to be saturated with important events that will surely make USD/JPY and EUR/JPY move. The yen is sensitive to the slowdown of the world economy and trade wars but begins to lose the status of a safe haven asset, yielding it to the US dollar. This was the case in 2018 when the escalation of the trade conflict between the US and China led to an increase in the USD index. It's just that the American economy looks better than its competitors, and the demand for Treasury bonds is great.

However, despite the strong labor market, the acceleration of core inflation to 2.2% and high GDP growth, the difference between the yield of 10 and 2-year US bonds inverted what happened for the first time since 2007. Over the past half-century, the indicator predicted a recession, so investors fear that the States are at the peak of the economic cycle, followed by a recession, and require the Fed to reduce the federal funds rate. The Central Bank is quite able to extend the already record economic expansion, as it was in the 1990s.

The Fed's willingness to weaken monetary policy in preventive measures, the ECB – to revive QE and reduce rates – leads to an increase in the global debt market with a negative yield of up to $16.7 trillion. The rates on Japan's 10-year bonds against the background of the global trend also went below the critical level of -0.2%, forcing BoJ to intervene. Also, the market is rumored that the rebound of USD/JPY from the psychologically important level of 105 – the merit of the Central Bank. He used currency interventions to prevent further decline in business activity. Japanese companies expect that the dollar will be £105-108 in the current financial year, and if it falls below, it will begin to reduce investment.

Dynamics of Japanese bond yields

Thus, investors are evaluating the ability of central banks with the help of a large-scale monetary stimulus to suspend the process of the global economic slowdown. It will turn out – the stock indices will go up, and the USD/JPY pair will continue to adjust. No – we expect the development of a pullback on the S&P 500 and the recovery of the upward trend on the yen.

Technically, USD/JPY continues to implement the pattern 5-0 on the daily chart. The situation is controlled by the "bears", and only the growth of quotations above 109.3 will increase the risks of a reversal of the downward trend. In this scenario, the expanding wedge model will be activated.