USD/JPY: Trading the Philadelphia Fed Manufacturing Index

The Philadelphia Fed Index is an important leading indicator, based on a survey of manufacturers in the Philadelphia area regarding their opinion of the economy. As such, it  provides a snapshot of the business climate and sentiment in the U.S.

Here are all the details, and 5 possible outcomes for USD/JPY.

Published on Thursday at 15:00 GMT.

Indicator Background

The Philadelphia Fed Index measures regional manufacturing growth. The manufacturing sector is a vital component of the economy, and the index provides a useful reading for determining whether the economy is in a growth or contraction phase. A reading which exceeds the market forecast is bullish for the dollar.

The October reading of 8.7 was excellent news for three reasons. Firstly, it was the first reading in positive territory since July. Second, the index  impressively exceeded the market prediction of -9.0. Finally, it was the third consecutive month of an upward trend, indicating renewed activity in the manufacturing sector. November’s forecast remains steady at 8.7. Can the index continue the bullish trend and beat the market’s prediction?

Sentiments and levels

Economic indicators in Japan are sending a mixed message. GDP was down in the second quarter, but the market is expecting growth in the third quarter, buoyed by a return to normal production levels after the earthquake and tsumani. In addition, there are signs of slight growth in consumer consumption and housing investment. So, the overall sentiment has turned from bearish to neutral on USD/JPY towards this release.

Technical levels, from top to bottom: 79.50, 78.50, 77.85, 77.50, 77, 75.95 and 75.57 and 75.

5 Scenarios

1. Within expectations: 4.0 to 13.0: In such a case, the yen is likely to rise within range, with a small chance of breaking higher.
2. Above expectations: 13.0 to 17.0: An unexpected higher reading can send USD/JPY well above one resistance level.
3. Well above expectations: Above 17.0: The chances of such a scenario are very low. A second resistance line might be broken on such an outcome.
4. Below expectations: 0.0 to 3.9: A lower reading than forecast would push USD/JPY downwards, and one support level could be broken.
5. Well below expectations: Below 0.0: A reading in negative territory would signal a contraction in the manufacturing sector. In this scenario, the pair could break two support levels.

For more on the yen, see the USD/JPY forecast.