USD/JPY at the lower side of ascending channel after 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 Jun 8, 2021
  • The USD/JPY pair rose modestly after the relatively better Japan GDP data.
  • The economy contracted by 3.9% in the first quarter.
  • Investments, consumer, and government spending fell in the first quarter.

The USD/JPY rose slightly during the Asian session even after the relatively strong economic data from Japan. The pair rose to 109.40, which was slightly higher than this week’s low of 109.18.

USD/JPY
USD/JPY price action

Japan upgrades GDP data

The Japanese economy contracted at a slower rate in the first quarter than was previously expected. Data by the Finance Ministry showed that the economy contracted by 1.0% in Q1 after expanding by 2.8% in the fourth quarter. This decline was better than the median estimate of a 1.2% drop. On a year-on-year basis, the economy contracted by 3.9% in the first quarter.

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All sectors of the Japanese economy contracted in the first quarter. Capital expenditure declined by 1.2% in the quarter after expanding by 4.3% in Q4. This contraction happened as companies paused their investments as the government implemented a state of emergency to curb the spread of the disease. 

Meanwhile, external demand declined by 0.2% in the quarter as other trading partners like in Europe implemented lockdowns. Most importantly, private consumption, the biggest part of the Japanese economy declined by 1.1%  after expanding by 2.2% in Q4.

Analysts expect that the country’s economy will rebound in the second quarter. Those polled by Nikkei see the economy growing by 1.84% year on year. In a note, an analyst told the paper:

“Consumer spending is likely set for a sharp rebound after June 20. Retailers are also expected to launch sales campaigns around the time of the lifting of the state of emergency. ‘Revenge consumption’ has happened in other countries as well.”

The USD/JPY also reacted to strong wage numbers. Overtime pay, which is a proxy for business activity, rose by 6.40% in April after falling by 5% in March. The average cash earnings also rose by 1.6% while the overall wage income of employees rose by 1.6%.

Looking ahead, the next key catalyst for the USD/JPY pair will be the upcoming US consumer price index (CPI) data that will come out on Thursday. Analysts expect these numbers to show that the headline CPI rose by 4.7% in May while core CPI rose by more than 3%.

USD/JPY technical analysis

USD/JPY
USD/JPY technical chart

The USD/JPY has formed a large ascending channel on the four-hour chart. The current price is slightly above lower side of the ascending channel. It is also between the 50% and 61.8% Fibonacci retracement level. The price has also dropped below the 25-day and 15-day exponential moving averages (EMA). Therefore, in the near term, the price will likely keep rising as bulls target the upper side of the channel at110.35.

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