USD/JPY and a Return to 145 in the Hands of Manufacturing PMIs

Highlights

• The USD/JPY will find direction this morning as the focus returns to the Japanese economy.
• Tankan survey-based figures for Q2 and manufacturing sector PMIs will garner interest.
• However, economic indicators from China and the US will likely have more influence.

It is a busy start to the Monday session for the USD/JPY. Tankan survey-based numbers for Q2  and manufacturing PMI figures will draw interest early in the Asian session. The Large Manufacturers Index will likely have more influence, with economists forecasting the Index to rise from +1 to +3.

However, finalized manufacturing PMI numbers from Japan will likely have a limited impact, with PMI numbers from China in focus. An unexpected contraction in the Chinese manufacturing sector would deliver USD/JPY weakness. Economists forecast the Caixin Manufacturing PMI to fall from 50.9 to 50.2.

The US Session

We expect US economic indicators to have more influence. The ISM Manufacturing PMI will draw plenty of interest later today. Investors should consider employment, inflation, and new order sub-components.

Softer-than-expected inflation numbers on Friday failed to ease bets on a Fed 25-basis point interest rate hike this month nor another move in September. Weak PMI numbers could impact sentiment toward a post-summer rate hike.

According to the CME FedWatch Tool, the probability of a 25-basis point July Fed rate hike stood at 86.8% versus 71.9% one week earlier. Significantly, the chances of the Fed lifting rates to 5.75% in September stood at 20.8%, up from 11.5% one week earlier.

USD/JPY Price Action

Daily Chart

The Daily Chart shows a USD/JPY breakout from the psychological 144 support level despite the markets responding to US inflation numbers. The USD/JPY remains above the 200-day (135.885) and 50-day (139.467) EMAs, signaling bullish momentum over the near and long term.

Notably, the 50-day EMA continues to pull away from the 200-day EMA and reflects bullish momentum despite two the Friday pullback.

Looking at the 14-Daily RSI, the 71.41 reading signals oversold territory, suggesting a return to sub-144.

4-Hourly Chart

Looking at the 4-Hourly Chart, the USD/JPY faces stern resistance at the 145 psychological level. Despite a bearish end to last week, the USD/JPY continues to sit above the 200-day (140.581) and 50-day (143.461) EMAs. Significantly, the 50-day EMA pulled further away from the 200-day EMA, signaling another test of the current resistance range of 144.3 – 145.0.

The 14-4H RSI reading of 53.51 indicates a moderately bullish stance, with buying pressure outweighing selling pressure. A fall below 50 would signal a fall through the 50-day EMA (143.461) to bring the support range of 141.9 – 141.2 into view.