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USDJPY: What’s Ahead for the Japanese Yen?

USDJPY yen
USDJPY yen

The USDJPY pair is down slightly as traders react to the relatively strong manufacturing data from Japan. The pair is trading at 105.47, which is lower than this week’s high of 105.80.

USDJPY fundamental analysis

Earlier today, data from the Bank of Japan and Markit showed that the manufacturing sector made some progress. According to Markit, the manufacturing PMI increased to 47.7 in September. That was better than the consensus estimate of 47.3 and the previous month’s increase of 47.3. However, with the index being below 50, it is a sign that Japan’s manufacturing sector is going through a tough period.

Meanwhile, survey data from the Bank of Japan showed that sentiment by different sizes of business made some improvement. The Tankan large manufacturers index increased to -27 in the third quarter while the non-manufacturers index rose to -12. The small manufacturers index rose to -12 while capital expenditure by small companies fell by 16.1% in the quarter.

Later today, the USDJPY will react to economic data from the United States. The Bureau of Labour Statistics will release the initial jobless claims data for the previous week. This data will come a day ahead of the official nonfarm payroll data. Also, the pair will react to the US manufacturing PMI numbers by Markit and the Institute of Supply Management (ISM).

In a report earlier today, analysts at UOB wrote that:

“The swift pull-back from the high amid improving downward momentum suggests the bias for today is tilted to the downside. From here, barring a move above 105.80, USD could edge downward to 105.25, with lower odds for extension to 105.10.”

USDJPY technical outlook

The four-hour chart shows that the USDJPY pair has been forming a rising and broadening wedge pattern in the past few days. This pattern is shown in green and is usually a bullish sign because, in most cases, it tends to break out in the direction of the initial trend. The price is also along the 50% Fibonacci retracement level.

Therefore, I take the opposite opinion from what analysts at UOB have forecasted. Instead, I expect it to bounce back as bulls attempt to retest the upper side of the wedge at ~105.60. On the flip side, a move below the lower line of the wedge will invalidate this trend.

USD/JPY technical chart

USDJPY