USD/JPY Bears Eye Sub-138.5 on China PMIs and Fed Sentiment

It is a busy start to the day for the USD/JPY. Capital spending numbers for Q1 and finalized manufacturing PMI numbers for May will be in focus. Barring a revision to the PMI, capital spending figures will likely draw more interest. Economic indicators from Japan have sent mixed signals.

The mixed signals suggest the status quo for the Bank of Japan and its ultra-loose monetary policy stance. Economists forecast capital spending to increase by 5.5% year-over-year in Q1 versus a 7.7% increase in Q4.

While the numbers from Japan will draw interest, China’s Caixin manufacturing PMI will have more impact. The NBS private sector PMI numbers fueled a flight to safety on Wednesday. A weaker-than-expected number would lead to a similar market response, favoring the Yen.

USD/JPY Price Action

This morning, the USD/JPY was down 0.07% to 139.244. A mixed start to the day saw the USD/JPY rise to an early high of 139.362 before falling to a low of 139.176.

Technical Indicators

Resistance & Support Levels

The USD/JPY needs to move through the 139.661 pivot to target the First Major Resistance Level (R1) at 140.091 and the Wednesday high of 140.416. A return to 140 would signal a bullish USD/JPY session. However, economic indicators and debt ceiling news must support a USD/JPY breakout.

In case of an extended rally, the bulls would likely test the Second Major Resistance Level (R2) at 140.845. The Third Major Resistance Level (R3) sits at 142.029.

Failure to move through the pivot would leave the First Major Support Level (S1) at 138.907 in play. However, barring a risk-off fueled sell-off, the USD/JPY pair should avoid sub-138. The Second Major Support Level (S2) at 138.477 should limit the downside. The Third Major Support Level (S3) sits at 137.293.

Looking at the EMAs and the 4-hourly chart, the EMAs send mixed signals. The USD/JPY sat below the 50-day EMA (139.271). The 50-day narrowed to the 100-day EMA, while the 100-day EMA widened from the 200-day EMA, delivering mixed signals.

A USD/JPY move through the 50-day EMA (139.271) would support a breakout from R1 (140.091) to target R2 (140.845) and 141. However, a fall through S1 (138.907) would bring S2 (138.477) and the 100-day EMA (138.186) into view. A USD/JPY move through the 50-day EMA would send a bullish signal.

The US Session

Looking ahead to the US session, it is a busy day on the US economic calendar.

ADP nonfarm employment change, initial jobless claims, and the ISM Manufacturing PMI will move the dial. While investors are pricing in a more dovish Fed, solid labor market numbers could refuel bets on a 25-basis point June interest rate hike.

According to the CME FedWatch Tool, the chances of a 25-basis point interest rate hike tumbled from 66.6 to 26.4% on Wednesday as the markets responded to Fed chatter that favored a June pause.

However, FOMC members and US debt ceiling-related news will also need consideration.