USD/JPY forms bearish flag as Tokyo emergency clouds outlook

The USD/JPY pair rose slightly even after the latest strong Japanese producer price index (PPI) and core machinery orders. The pair rose to 110.16, which was slightly above last week’s low of 109.53.

Japan PPI data

Japan has been an outlier on inflation this year. As consumer prices have surged globally, recent data showed that Japan’s consumer price index has struggled. At the same time, the country’s producer price index (PPI) has risen, widening its gap with the CPI.

Data published by the statistics agency showed that the headline PPI dropped from 0.8% in May to 0.6% in June. This increase led to a year-on-year increase of 5.0% as the prices of key commodities remained at elevated levels.

Additional data showed that Japan’s economy continued to show strong demand in May. Core machinery orders rose from 0.6% in April to 7.8% in May. This increase was better than the median estimate of 2.6%. As a result, the orders rose by 12.2% year-on-year after rising by 6.5% in April. This was the third straight month of increases.

The data showed that the orders were boosted by manufacturers, whose orders rose by 2.8%. Non-manufacturers orders rose by 10% after falling by 10%.

Still, the USD/JPY rose partly because of the new state of emergency in Tokyo as the number of coronavirus cases rose. The new state of emergency will run until August 22, which has clouded the overall outlook of the economy. As a result, the government is said to consider a new stimulus package to manage the situation. A powerful member of Suga’s party said that the government needed another $270 billion extra budget.

Later this week, the USD/JPY will react to the latest US consumer and producer price index (CPI and PPI) that will come out on Tuesday and Wednesday. It will also react to the latest US manufacturing index and retail sales data.

USD/JPY technical analysis

The four-hour chart shows that the USD.JPY pair moved below the blue ascending channel two weeks ago. It then dropped by 1% to 109.52 and then bounced back to today’s 110.16. The pair has moved below the 25-day and 50-day exponential moving averages (EMA). It has also formed a bearish flag pattern that is shown in orange. Therefore, the pair will likely resume the downward trend as bears target last week’s low at 109.53.