USD/JPY forms bullish flag after the weak Japan GDP data

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his wife, son,… read more.
on May 18, 2021
  • The USD/JPY pair has formed a bullish flag pattern on the 1H chart.
  • Data showed that Japan’s GDP declined at a faster rate than expected.
  • Government spending, business investment, and consumer spending declined.

The USD/JPY pair was in a tight range on Tuesday morning after the latest Japan GDP data and ahead of US housing starts numbers. It was trading at 109.20, which was 0.55% below last week’s high of 109.80.

USD/JPY
USD/JPY chart

Japan GDP data

The recent state of emergency in Japan had a negative impact on the country’s economy. According to the Finance Ministry, the economy contracted by 5.1% from the previous quarter after rising by 11% in the fourth quarter. It also expanded by 12.7% in the third quarter. On a quarter-on-quarter basis, the country’s economy contracted by 1.3% after rising by 2.8% in the fourth quarter.

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Data by the ministry showed that the contraction was broad-based. Capital expenditure declined by 1.4% in the first quarter as companies struggled with supply challenges. Analysts were expecting capital formation to rise by 1.1%. At the same time, external demand declined by 0.2% due to these supply challenges. Further, private consumption, the biggest part of the economy, declined by 1.4%, better than the expected 2.0%.

Analysts expect that Japan’s economy will lag other developed country peers going forward. Furthermore, Yoshihide Suga’s administration has lagged other countries in vaccinations. Further, many companies in the country are facing the challenge of chip shortages. In a note, analysts at Dai-Ichi Life said:

“Consumer spending is the biggest missing piece for the economy and it’s hard to predict because it’s very much dependent on the virus situation.”

The USD/JPY pair will later react to the upcoming US housing starts and building permits data. The numbers are expected to show that building permits rose from 1.759 million to 1.77 million in April. Similarly, they expect that housing starts rose to more than 1.71 million.

USD/JPY technical outlook

USD/JPY
USD/JPY technical chart

The hourly chart shows that the USD/JPY pair has formed a descending channel pattern. The lowest part of this channel was at 109.07, which was along the 50% Fibonacci retracement level. The pair is also stuck at the 25-day and 15-day exponential moving averages (EMA) while the Relative Strength Index (RSI) is at the neutral level of 50. Therefore, the pair will likely break out higher since this channel seems to be part of a bullish flag pattern. This prediction will be invalidated if it moves below the 50% retracement level.

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