The USD/JPY price rally continued today because of the overall dollar strength and the relatively weak Japanese services PMI data. It rose to 105.15, which is the highest level since November 13.
Japan services sector deteriorated
January was a difficult month for Japan as the number of coronavirus cases continued to rise. In response, the government announced another large state of emergency that affected most provinces.
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The impact of these actions was seen in the manufacturing and services PMI data released this week. On Monday, data by Markit showed that the manufacturing PMI was at 49.8. A PMI reading below 50 is usually a sign of contraction.
Earlier today, data revealed that the services PMI dropped from the previous 47.7 to 46.1. This happened as new business declined at the fastest pace since May last year. Service providers reported higher costs because of the rising cases. Still, they continued to hire while their optimism about the economy rose. The report said:
“Overall private sector activity fell further in January, and at a faster pace. Both the manufacturing and service sectors saw output fall, with the larger service sector noting the sharper contraction.”
The USD/JPY will next react to important economic data from Japan and the United States. Tomorrow, the US will publish its jobless claims and factory order numbers. On the following day, the Labour Department will publish the important nonfarm payroll numbers. Economists expect the economy added about 50,000 new jobs in January.
The pair will also react to Japan’s household spending data and the coincident and leading indicators that will come out on Friday.
USD/JPY technical outlook
In January, I used the four-hour chart to predict that the USD/JPY would have a bullish breakout. I pointed to the bullish flag pattern that was forming.
The breakout happened on January 27 when the price rose above the upper side of the flag at 103.75. The pair has risen by more than 1.80% since then. Interestingly, this distance is the same as the flag post.
It is also above the 25-day and 15-day weighted moving averages (WMA). Therefore, while the overall trend remains bullish, there is a high possibility of a pullback. That’s because of the distance of the movement above the flag and the fact that the Relative Strength Index (RSI) is showing a bearish divergence.