USD/JPY: Levels to watch after modest Japan manufacturing PMI data

on Jul 22, 2020
  • The USD/JPY pair declined slightly after Markit released manufacturing and services PMI data from Japan.
  • The flash manufacturing PMI rose to 42.6 from the previous 40.1 while the services PMI rose to 45.2.
  • The data show that the economy's recovery is slower than in most countries like in Europe and China.

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The USD/JPY pair dropped slightly as traders reacted to the latest manufacturing PMI data from Japan. The pair is trading at 106.85, which is slightly above the intraday low of 106.73.

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USD/JPY falls as Japan’s manufacturing sector improves

Japan manufacturing sector makes slow progress

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The manufacturing sector in Japan made some progress in July as the country continued to reopen. That is according to au Jibun Bank and Markit, which released the flash manufacturing PMI data earlier today.

The data showed that the manufacturing PMI rose to 42.6 in June from the previous 40.1. This was the biggest number since April this year. A PMI reading of 50 and below is usually an indication that a sector is contracting.

According to Markit, production and new orders continued to decline, albeit at a slower rate while companies continued to lay off their staff. At the same time, goods producers continued to reduce their purchasing activities and inventories. In a statement, Bernard Aw of Markit said:

“As the economy remained in a downturn, companies sought to contain costs and survive the pandemic by cutting jobs. Employment continued to fall in July, with factory jobs reduced at a sharper rate than seen in the service sector. Rising unemployment adds to fears that consumption may weaken in the coming months.”

Meanwhile, the flash services PMI rose slightly from 45.0 to 45.2 in July. According to Markit, new business inflows continued to decline while the amount of incomplete work also declined. As a result, employment in the sector declined for the fifth straight month.

Japan economy making slow recovery

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Other numbers from Japan shows that the economy is going through its worst contraction in years. For example, this week, data from the Ministry of Finance showed that exports declined for the 18th straight month. This was an important number considering that Japan is mostly an export-oriented economy. Similarly, household spending and overtime pay have also been falling.

In recent months, some of the biggest manufacturers in Japan have warned about their businesses. For example, last week, Nissan said that it was cutting 30% of global production. Other automakers like Mazda, Toyota, and Isuzu have also slashed their production.

Meanwhile, the services industry is going through a significant downturn. For example, thousands of companies in the hospitality industry have recently filed for bankruptcy. More will follow as foreign travel remains being subdued.

The flash PMI numbers were released a week after the Bank of Japan left interest rates unchanged and warned of an uneven recovery.

USD/JPY technical outlook

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USD/JPY technical forecast

The USD/JPY pair is trading at 106.85. On the daily chart, the price is a few pips above the 50% Fibonacci retracement level. It is also slightly below the 50-day and 100-day exponential moving averages. Also, the Average True Range (ATR), which is an important measure of volatility, has dropped to the lowest level since February this year. Therefore, the outlook for the pair is neutral, with key levels to watch being 107 and 106.

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