Summary
- The Japanese economy has barely come out of the doldrums, but new coronavirus restrictions mean that it will suffer more setbacks.
- The dollar’s next action will greatly depend on upcoming unemployment figures.
A slowdown in the Japanese economy may hold back the yen
The U.S. dollar failed to pull down the yen on Tuesday, as the Japanese currency held on to 109.00. This was helped by a better-than-expected Japanese PMI of 53 against an expected figure of 52.5 and a rise in U.S.treasury yield to as high as 1.639%.
The U.S. dollar had made marginal gains on Friday against most major currencies but then reversed the gains on Monday, as jittery investors held on against the prevailing dovish approach by the Fed. Notably, the greenback gained ground over the Japanese yen, recording a two-month high of 110.20 on Friday, but slipped 0.2% early Monday.
The dollar’s price action was attributed to last week’s inflation figures that went above analysts’ expectations. This provided renewed confidence that the Fed’s buying activity may slow down in the coming weeks.
Japan’s economy has only recently gone back to recovery after taking a bite from Covid-19. However, the bullish approach to the dollar may yet drag back the yen. In addition, Japan has recently experienced a surge in Covid-19 infections, which may further weaken the yen.
Japan has already extended restrictive control measures, including a state of emergency in an additional eight regions. This is expected to last until June 20th, presenting another setback to Japan’s economic recovery and the yen. Already, the economic data released on Monday, May 31st, gave a less-than-glittery picture of the economy.
US unemployment figures key to next price action
Focus has shifted to the next significant event in the economic calendar, which is only two days away. Many currency traders have set their eyes on Friday’s expected release of U.S. unemployment figures. The figures will help establish a basis for weighing the probability of the dollar gaining more strength in the coming days. Notably, USD/JPY has risen by a significant 8% since its lowest level this year, recorded in January.
Indications are that the rate of unemployment may decline significantly, going by Bloomberg’s estimation of about 650,000 jobs created in May. If these figures hold, it would be more than double the numbers reported for April. The dollar’s slow gains in the past month could easily have been as a result of the below-par performance by the U.S. economy in creating jobs, with the initial estimates for April having been placed at over one million new jobs.
Japan’s key economic data that came out on Monday was a bag of mixed fortunes. The country’s March large retail sales were up by 15.5%, while the Consumer Confidence Index missed the target by 1.2% to 34.1%. Industrial production grew by 2.5% but still missed the target. With new lockdown measures, the yen will certainly feel the effects of stifled economic growth.
The strong show by the dollar at the end of May can be a result of growing optimism by investors regarding U.S. economic growth figures. However, Friday’s jobs data will be key in sustaining the gains made.
Lower-than-expected unemployment figures could easily push the world’s reserve currency to make more gains. However, disappointing figures will fuel investors’ sentiments about the U.S. economic growth prospects, thus wiping the recent gains made by the greenback.
Technical analysis
As seen on the chart below, the shorter SMA has crossed the longer SMA and gone below it. This is a sell signal for the dollar. Similarly, the price has also crossed the two SMAs and gone below them, thus sending another sell signal.
The USD/JPY pair should find support at 109.376 but will attempt to rise to 109.581, where it should meet the first resistance. Beyond this point, it may go to the second resistance level at 109.749.
