USDJPY: What Next For the Vulnerable Japanese Yen?

Summary:

The USDJPY pair is in its third straight day in the green as investors react to weak economic data from Japan and the strong data from the United States.

The USDJPY is in its third straight day in the green as the US dollar rally gains momentum. The pair is up by 0.15% and is trading at 106.32. The dollar index, on the other hand, is up by 0.20% in early trading.

The biggest catalyst for the USDJPY strength is the signs that the US economy is doing relatively better than what analysts were expecting. For example, data released this week has shown that the American manufacturing PMI rose sharply in August.

And yesterday, data from ADP showed that American employers added more than 428,000 new jobs in August. Although that number was lower than what analysts were expecting, it sent a signal that the economy is improving. Similarly, data released yesterday showed that factory orders made an improvement in the previous month.

Meanwhile, there is uncertainty in Japan after Shinzo Abe announced his resignation last week. While the new leader is expected to continue with Abe’s policies, investors are worried about what will happen.

At the same time, recent economic data from Japan have not been all that pleasing. For example, data released today showed that the services PMI dropped to 45.0 in August from the previous 45.4. That means that the services sector has been in contraction mode since January this year when the PMI was at 51.0.

The important manufacturing sector has been in trouble too. Data released on Tuesday showed that the PMI rose to 47.5, which means that it too has been contracting.

USDJPY technical outlook

The daily chart shows that the USDJPY pair has been in the green in the past three consecutive days. The price remains slightly below the 50-day and 100-day exponential moving averages. Also, the price is slightly below the 50% Fibonacci retracement level while the volatility has been falling.

I suspect that the pair, which is forming a three white soldiers pattern, will continue rising as bulls aim at the next resistance level at 107.00. (As you can read in our free trading course, the three white soldiers pattern is usually bullish). On the flip side, a move below Friday’s low of 105.23 will invalidate this trend.