USD/JPY Bulls to Target 143 on Private Sector Divergence

Highlights

• It is a busy start to a busy week for the USD/JPY, with prelim private sector PMIs in focus.
• A pickup in activity across Japan’s private sector would fuel bets on a Friday Bank of Japan tweak.
• The near-term technical indicators are bullish, signaling a return to 142.

On Friday, the USD/JPY rallied by 1.25% to end the day at 141.827. Bets on a US soft landing and Fed angst supported a breakout session.

This morning, Japan’s private sector will draw interest, with prelim PMI numbers for July in focus. A pickup in private sector activity would support bets on a Bank of Japan tweak on Friday.

However, economists forecast the services PMI to fall from 54.0 to 53.4 and the manufacturing PMI to hold at 49.8. Investors need to consider the sub-components, including prices and employment.

Softer input and output price pressures across the private sector would ease pressure on the BoJ to tweak. A contraction across the private sector would also be bearish, with the BoJ mindful of the macroeconomic environment.

After the Inflation figures numbers on Friday, the PMIs and the Tokyo inflation numbers on Friday could cement expectations of a tweak to the BoJ yield curve control (YCC) policy.

The US Session

Prelim private sector PMI numbers for July will be in focus later today. We expect the services PMI to have more impact on market risk sentiment. However, investors should consider the sub-components, including prices, employment, and new orders.

A hotter-than-expected services PMI would support a more hawkish Fed.

The services sector accounts for more than 70% of the US economy, making the markets sensitive to service-sector-related stats. A pickup in services sector activity would support improving labor market conditions and demand-driven price increases. Such a scenario would force the Fed to push interest rates higher to curb demand and hiring to ease inflationary pressures.

USD/JPY Price Action

Daily Chart

The Daily Chart showed the USD/JPY break through the 141.2 – 141.9 resistance band before easing back to sub-141.9. After a six-day winning streak, the USD/JPY remained above the 50-day (140.060) and 200-day (136.595), sending bullish near and longer-term time price signals.

Notably, the 50-day EMA pulled away from the 200-day EMA, affirming the near-term bearish trend reversal.

Looking at the 14-Daily RSI, the 55.57 reading signals a bullish outlook, supporting a breakout from the 141.2 – 141.9 resistance band to target 143. However, a USD/JPY fall through the 50-day EMA (140.060) would give the bears a run at the 139.5 – 138.8 support band.

4-Hourly Chart

Looking at the 4-Hourly Chart, the USD/JPY faces strong resistance at 142. However, the USD/JPY sits above the 200-day (140.642) and 50-day (140.090) EMAs, sending bullish near and longer-term price signals.

Significantly, the 50-day EMA narrowed on the 200-day EMA, signaling a breakout from the 141.2 – 141.9 resistance band to target 143. However, a USD/JPY fall through the 50-day EMA (140.090) would bring the 139.5 – 138.8 support band into view.

The 14-4H RSI reading of 69.46 sends bullish signals, with buying pressure outweighing selling pressure. Notably, the RSI supports a breakout from the 141.2 – 141.9 resistance band to target 143.