USD/CNY forms bearish flag after strong China services PMI 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… read more.
on Aug 4, 2021
  • The USD/CNY has formed a bearish flag on the four-hour chart.
  • China services PMI increased from 50.3 in June to 54.9 in July.
  • The manufacturing sector has lagged in the past few months.

The USD/CNY retreated on Wednesday after the relatively strong China services PMI data. The pair declined to 6.4585, which was slightly below the resistance level at 6.4700.

China services sector growth

China has emerged as a key beneficiary of the coronavirus pandemic. As countries locked up their economies, they turned to China for most of their products. This is evidenced by the giant trade surplus the country has released in the past few months. 

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The Chinese services sector recorded strong growth in July. According to Caixin and Markit, the country’s services PMI increased to 54.9 in July from 50.3. This was the highest the PMI has been since May when it rose to more than 55.0. The data shows that the sector maintained the momentum as demand for local services like restaurants and hotels rose.

On the other hand, the manufacturing sector has recently shown some stabilisation. On Saturday, data by China Logistics showed that the manufacturing PMI declined from 50.9 to 50.4. This means that it is slightly above the expansionary zone of 50.0. Similar data by Caixin revealed that the PMI declined from 51.3 to 50.3 in July. The Chinese manufacturing PMI has been in a slow downward trend.

Looking ahead, the key catalyst for the USD/CNY will be the US labour market. On Wednesday, ADP Institute will publish the latest private payrolls numbers. The data will be followed by the latest initial jobless claims numbers scheduled for Thursday and the official non-farm payrolls data scheduled for Friday. 

The pair has reacted mildly to the recent tough regulations from China. In the past few weeks, the Chinese communist party has intensified its crackdown in technology sectors. As a result, there is a likelihood that many foreign investors will pull their funds from the country. 

USD/CNY technical analysis

USD/CNY

The four-hour chart shows that the USD/CNY pair has been in a deep downward trend. It has declined from a high of 6.5115 to today’s low of 6.4585. This price action is notable considering that it has formed a bearish flag pattern. This pattern is usually a signal that the price will break out low. The pair has moved below the 25-day and 50-day moving averages. Therefore, there is a possibility that the pair will decline to the 50% retracement level at 6.4332.

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