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The Manufacturing PMI (Purchasing Managers’ Index) is an important leading indicator which focuses on the manufacturing sector. As this index  is released  at the beginning of each month, analysts and traders closely examine the index for any hint of a market trend.   A reading which is higher than the market forecast is bullish for the dollar.

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

Published on Tuesday at 15:00 GMT.

Indicator Background

The PMI is based on a comprehensive survey of purchasing managers in the  manufacturing sector, who are  asked about their activity level and current expectations as to how the economy will perform. A reading above 50 indicates that the non-manufacturing sector is growing, while  a figure  below 50 signify economic contraction.

The  December reading brought modest good news for two reasons. The index was up slightly from the  November reading, rising  to 52.7 from 50.8. Second, the index beat the market forecast  of 51.6. The prediction for the  January reading is up to  53.3.  If the index  does rise again, this could signal an upward trend  and a very positive start to 2012.

Sentiment and technical levels

The US economy is finally showing some signs of life, and the dollar has taken advantage, rallying against most currencies. Although the yen has managed to hold its own against the dollar, economic indicators in Japan continue to disappoint, and it may only be a matter of time before this is reflected in USD/JPY. So,  the  overall sentiment is  bullish on USD/JPY prior to this release.

Technical levels, from top to bottom: 80.25, 79.50, 78.30, 77.50, 77,  76.75, 76.25 and 75.95.

5 Scenarios

  1. Within expectations: 52.0 to 54.3: In this case, USD/JPY may fluctuate slightly within range, with a small chance of breaking higher.
  2. Above expectations: 54.4 to 55.4: A better reading than forecast will reinforce the upward trend of the index. The pair is likely to rise and break at least one  resistance level.
  3. Well above expectations: Above 55.4: The chances of such an outcome are low. Such a scenario would push  the pair upwards, and a second  resistance level might be broken as a result.
  4. Below expectations:  50.9 to 51.9 points: A smaller than forecast gain would likely push  USD/JPY  downwards and break one  support level.
  5. Well below expectations: Below 50.9: a reading indicating sharp economic contraction is not likely, as economic conditions have been improving slightly. In this case, the pair could challenge a second  support level.

For more about the Japanese yen, see the  JPY to USD forecast.