- Investors were panicking on Monday that the US economy was headed for recession.
- The ISM reported that the services PMI rose from 48.8 in June to 51.4 in July.
- Markets are pricing in a 75% chance of a 50 basis point Fed rate cut in September.
The outlook for USD/JPY is slightly bullish as the yen pauses its five-session rally. At the same time, the dollar recovered after data in the previous session revealed a recovery in the US services sector in July.
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The yen retreated after hitting a fresh high in the previous session amid safe-haven demand. Especially on Monday, there was a panic in the markets that the American economy was heading for recession. These fears stemmed from recent economic data showing the unemployment rate rising to a three-year high of 4.3%.
Moreover, US stocks sold off due to poor earnings reports, fueling fears of a recession. Traditional haven assets such as the yen have gained amid these concerns. However, this rally was paused on Monday after the US released data on services sector activity.
The ISM reported that the services PMI rose from 48.8 in June to 51.4 in July, higher than the forecast of 51.0. The services sector has returned to expansion, reducing some of the recession fears. In addition, expectations for a cut in interest rates have been slightly reduced. Markets are now pricing in a 75% chance of a 50 basis point Fed rate cut in September.
However, expectations for a rate cut will remain high if inflation continues to ease and the economy slows. This will weigh on the dollar and keep the yen strong. At the same time, if the BoJ continues to tighten monetary policy, the outlook for USD/JPI will remain bleak.
USD/JPI Key Events Today
There will be no major releases from the US or Japan. Therefore, the pair could be consolidated.
USD/JPI Technical Outlook: Bulls re-emerge as downtrend breaks
On the technical side, the USD/JPI price pulled back to retest the key 145.05 level. Although the downtrend has stalled, the bearish bias remains strong. Price is trading below 30-SMA and RSI is below 50.
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Therefore, if the pullback continues, the price could retest the 30-SMA resistance before making new lows. However, if the bears are ready, they could return to the 145.05 level, to push the price to the next support at 140.00. A lower low will confirm the continuation of the downtrend.
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