- Investors panicked on Monday that the US economy was heading for a 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-bps Fed rate cut in September.
The USD/JPY outlook 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 rebound in the US services sector in July.
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The yen retreated after reaching a new high in the previous session amid safe-haven demand. Notably, there was panic in the markets on Monday that the US economy was heading for a recession. These fears came from recent economic data showing a surge in the unemployment rate to a three-year high of 4.3%.
Furthermore, US equities sold off due to poor earnings reports, which fueled recession fears. Traditional safe-haven assets like the yen have gained amid these concerns. However, this rally paused Monday after the US released service sector activity data.
The ISM reported that the services PMI rose from 48.8 in June to 51.4 in July, which was higher than the forecast of 51.0. The services sector returned to expansion, reducing some of the fears of a recession. Additionally, rate cut expectations eased slightly. Markets are now pricing in a 75% chance of a 50-bps Fed rate cut in September.
Nevertheless, rate-cut expectations will remain high if inflation continues easing and the economy slows. This will weigh on the dollar and keep the yen strong. At the same time, if the BoJ continues tightening monetary policy, the outlook for USD/JPY will remain bleak.
USD/JPY key events today
There won’t be any major releases from the US or Japan. Therefore, the pair might consolidate.
USD/JPY technical outlook: Bulls resurface as downtrend pauses
On the technical side, the USD/JPY price has pulled back to retest the 145.05 key level. Although the downtrend has paused, the bearish bias remains strong. The price trades below the 30-SMA, and the RSI is below 50.
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Therefore, if the pullback continues, the price might retest the 30-SMA resistance before making new lows. However, if bears are ready, they might return at 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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Saqib Iqbal
