USD/JPY Bears to Target Sub-142 on Soft Services PMI and the Fed

Highlights

• Inflation in Japan softened in May but came in hotter than expected.
• However, prelim private sector PMIs for Japan were disappointing, with the manufacturing sector unexpectedly contracting in June.
• Later today, US private sector PMI numbers will fuel the Fed policy debate.

It is a busy start to the Thursday session for the USD/JPY. Inflation and private sector PMIs from Japan garnered plenty of interest this morning.

Japan’s annual inflation rate softened from 3.5% to 3.2% in May, with core inflation easing from 3.4% to 3.2%. Economists forecast the headline inflation rate to accelerate to 4.1% and core inflation to soften to 3.1%.

While the hotter-than-expected core inflation rate and sticky headline inflation could force the Bank of Japan to begin tweaking its ultra-loose monetary policy stance, private sector PMI numbers disappointed.

According to prelim numbers, the manufacturing PMI fell from 50.6 to 49.8, with the services PMI declining from 55.9 to 54.2. Economists forecast PMIs of 50.7 and 56.2, respectively.

Overall output grew at the least marked pace in four months, with new orders falling across the manufacturing sector. New export orders across the private sector declined at a more marked rate in June, weighed by the manufacturing sector.

However, inflationary pressures eased. Input and output prices softened at the end of the quarter.

Last Friday, the Bank of Japan left monetary policy ultra-loose. The markets expect a tweak to the Bank’s Yield Curve Control (YCC) Policy. The Bank currently maintains a 0% cap on the 10-year bond yield. Today’s economic indicators will give the Bank of Japan food for thought.

A contraction in the manufacturing sector and economic woes in China may force the BoJ to stay ultra-loose for longer.

USD/JPY Price Action

This morning, the USD/JPY was down 0.10% to 142.811. A mixed start to the day saw the USD/JPY rise to an early high of 143.180 before falling to a low of 142.811.

Technical Indicators

Looking at the EMAs and the 4-hourly chart, the EMAs sent bullish signals. The USD/JPY sat above the 50-day EMA (141.397). The 50-day pulled away from the 100-day EMA, with the 100-day EMA widening from the 200-day EMA, delivering bullish signals.

A USD/JPY hold above S1 (142.071) and the 50-day EMA (141.397) would support a breakout from R1 (143.688) to target R2 (144.265). However, a fall through S1 (142.071) and the 50-day EMA (141.397) would bring S2 (141.031) into view. A slide through the 50-day EMA would send a bearish signal.

Resistance & Support Levels

The US Session

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

Prelim US private sector PMIs will move the dial. We expect the services PMI to garner greater interest. However, investors should look beyond the headline figures, with employment, new orders, and inflation as the focal points.

Beyond the numbers, FOMC members will also need monitoring. FOMC members Bullard and Bostic are on the calendar to speak today.

After Fed Chair Powell’s two days of testimony, there was little change in Fed rate hike bets.

According to the CME FedWatch Tool, the probability of a 25-basis point July rate hike stood at 76.9% on Thursday versus 74.4% on Wednesday. The chances of the Fed lifting the Fed Funds Rate to 5.75% in September increased from 11.9% to 13.8%.