The USD/JPY pair is trading at a key resistance level after the relatively weak economic data from Japan. The pair is trading at 113.86, where it has struggled to move past since April 2017. It has risen by more than 10% from its lowest level this year.
Japan GDP data
The Japanese economy had a relatively weaker than expected third quarter. According to the statistics agency, the country’s economy contracted by 0.8% in Q3 after it expanded by 0.4% in the second quarter. This QoQ decline was worse than the median estimate of -0.2%.
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On a year-on-year basis, Japan’s GDP contracted by 3.0%, which was worse than the second quarter’s expansion of 1.5%.
The statistics agency attributed the weakness to the sharp decline in private consumption. This consumption dropped by 1.1% in the third quarter after it rose by 0.9% in Q2. It was worse than the expected decline of 0.5%. This decline is notable since consumer consumption is the biggest part of the Japanese economy.
Meanwhile, capital expenditure crashed by 3.8% in Q3 after rising by 2.2% in Q2. The two declines were partially offset by the 0.1% expansion of external demand.
Therefore, the USD/JPY price has risen as investors anticipate more divergence from the Bank of Japan and the Fed.
While the Fed has already started tightening, the Bank of Japan is expected to continue its easing trend for a while. In its recent meeting, the bank decided to start winding down its asset purchases by about $15 billion. The bank also left room for more tightening in a bid to slow inflation growth.
The BOJ, on the other hand, left its policies unchanged. Therefore, with the slow GDP growth, and with relatively low inflation, the bank will likely continue easing.
The daily chart shows that the USD/JPY pair has been in a relatively tight range in the past few weeks. The pair has formed a bullish flag pattern that is shown in green. It has also moved slightly above the 25-day and 50-day moving averages while the MACD has formed a bearish divergence pattern.
Therefore, because of the weak Japan GDP data and the bullish flag, there is a likelihood that it will have a bullish breakout soon. If this happens, the next key level to watch will be at 114.50.
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