- The USD/JPY pair declined slightly as traders reacted to the strong manufacturing PMI data from Japan.
- The pair also reacted to relatively strong Q1 GDP data from Japan.
- The data showed that the economy contracted by 2.2% in Q1 (vs estimated 2.8%)
The USD/JPY pair dropped sharply during the Asian session as traders reacted to Japan’s manufacturing PMI data. The pair is trading at 105.80, which is below last Friday’s high of 106.43.
Japan manufacturing sector improves
Unlike in Australia, the manufacturing sector in Japan is very important. The sector employs more than 10 million people, equivalent to about 8% of the country’s total population. It is responsible for more than 10% of the total GDP. Its manufactured products like Toyotas and Hondas are used around the world.
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According to Markit and au Jibun bank, the manufacturing sector made strong progress in July as the country continued to reopen. The headline manufacturing PMI rose to 45.2 in July, up from 40.1 in the previous month. A PMI reading of below 50 usually shows that a sector is in contraction. Still, the number was notably higher than the 11-year low of 38.4 seen in April.
The data showed that manufacturing volumes dropped at the slowest pace in five months. Similarly, new orders fell to the smallest degree since February. In a statement, Tim Moore of Markit said:
“Looking at output trends by market group, consumer goods fared better than the rest of the manufacturing sector. Production of consumer goods was close to stabilisation in July, despite a headwind from weaker orders from abroad.”
The data came a few minutes after the government released the lagging Q1 GDP data. The numbers showed that the economy shrank by 2.2% in the first quarter compared to the first three months of 2019. This slowdown was slightly better than the 2.8% that analysts were expecting.
This data came two weeks before the first preliminary second quarter GDP data. Analysts believe that the economy shrank by about 20% in the second quarter. That will be the worst slowdown since 1955. Still, it will be better than the 32.9% contraction in the United States and the 40% in the Eurozone. At the same time, recent trends in retail sales and industrial production signal that the economy is recovering.
USD/JPY technical outlook
The USD/JPY pair is trading at 105.83, which is lower than the intraday high of 106.46. On the daily chart, the price is between the 50% and 38.2% Fibonacci retracement levels. After the sharp spike on Friday, I expect that the pair will form a bullish pennant pattern today because of the indecision between bulls and bears. This pattern is usually bullish in nature, which means that the pair is likely to continue rising as bulls aim for the next resistance level at 107.00.