Concerns over weak inflationary pressure and slow wage growth had kept the Greenback weak against the Yen, despite the accommodative policy of the Bank of Japan. In the past two weeks, the USDJPY pair had fallen from a high of 114.28 to 110.72. We expect a continuation of the downtrend due to the reasons given below.
According to the Bureau of Economic Analysis, the real GDP of the US increased at an annual rate of 2.6% in the second quarter of 2017. The advanced estimate was better than the 2.5% growth anticipated by analysts and better than the 1.4% reported in the previous quarter. However, the advance GDP price index declined to 1% in the second quarter, compared with a 1.9% increase in the prior quarter, and lower than analysts’ estimates of 1.3% growth. The advance GDP price index is mainly used by the central bank to assess inflation.
Last Friday, the US Bureau of Labor Statistics announced that the Employment Cost Index grew 0.5% in the second quarter, compared with a 0.8% increase in the earlier quarter, and lower than the 0.6% increase expected by economists. The Employment Cost Index is a leading indicator of consumer inflation. When enterprises spend more on labor, the higher costs are passed on to the consumer.
Earlier on Friday, the Statistics Bureau of Japan had announced a series of optimistic economic data. According to the institution, Japanese household spending increased 2.3% y-o-y in June. It is the biggest annual gain since August 2015. The household spending had declined 0.1% in May. Thus, economists had forecast only a marginal rise of 0.6% in June. Notably, consumer spending has increased for the first time in 15 months.
The consumer prices rose only 0.4% in June, from a year earlier, but in line with analysts’ estimates. The inflation rate was 0.4% in the previous month as well. The weak inflationary pressure continues to remain a cause of concern for the Bank of Japan.
According to the Statistics Bureau of Japan, the unemployment rate fell to a 43-year low of 2.8% in June. The market had expected an unemployment rate of 3%. In May, the unemployment rate was 3.1%. Thus, strong economic data is expected to keep the yen bullish against the Greenback.
After failing to stay above the resistance level of 111.60, the USDJPY pair has started declining. The pair is also moving below the 50-period moving average. The money flow index reading has fallen below 50. That indicates a lack of support for the Greenback. Thus, we forecast a continuation of the USDJPY pair’s downtrend.
To benefit from the impending downtrend, we would like to open a short position at 110.80 levels. A stop-loss order above 111.80 would be placed to avoid large losses. If there is no change in the trend, we would book our profit near 109.40.
We also wish to buy a put option or its equivalent contract from a binary broker of choice. A strike price of 110.40 and an expiry date around August 8th is preferred for the option trade.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
