US PMI weakness sparks USD/JPY reversal

US non-manufacturing PMI tumbles, adding yet more fuel to the fire for dollar weakness. This has provided a great reversal for USD/JPY which could provide trading opportunities as the week goes on.

Dollar and yen notes
Source: Bloomberg

This afternoon has provided yet another shocker from the US economy, with a sharp deterioration in the ISM non-manufacturing PMI number building on the disappointment felt from Friday’s weak jobs report. With the measure tumbling to its lowest level since early 2010 (51.4), there are clear worries which arise regarding the services sector.

However, the issues are clearly not confined services, given the equally shocking deterioration in the manufacturing figure last week (49.4 from 52.6). Add all this together and you have both manufacturing and services industries struggling at the same time the employment market fails to capitalise on recent improvements.

This is sure to have an impact upon the Federal Reserve’s view on whether the economy is sufficiently stable to raise rates in the coming months and as such we are seeing a widespread deterioration in the dollar.

One great example of a currency pair which seems to have turned a corner is the IN_USDJPY, which has benefitted from the dollar weakness, but also seen traders move to the yen as a safe haven play. The daily chart highlights the clear reversal we have seen from trendline resistance. The stochastic oscillator is in a bearish reversal from overbought territory (>80).

Looking at the previous occasions as highlighted by the vertical dotted lines, this has been a good indicator to find USD/JPY tops. In particular the break back below the 80 mark as a sell signal. 

The four-hour chart highlights the head and shoulders pattern that has now been completed. Clearly, anyone looking to trade this pattern has largely missed the boat by now (the projected target is ¥101.80), yet it is a strong market top pattern and highlights the fact that we look set upon a new trajectory. As such, we could see some nice shorting opportunities on any rallies, with further downside likely to come in the coming days. 

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