The US dollar’s gains were temporarily halted against the other major currencies after data released yesterday showed that the slowdown in the US economy may have accelerated in August. The USD/JPY pair retreated to the support level 135.80, after gains at the beginning of the week’s trading, towards the resistance level 137.70 and settled around the 136.75 level at the time of writing the analysis.

As announced, the S&P Global PMI survey of the US economy showed a sharp decline in service sector activity, with the services PMI reading at 44.1, well below the 49.2 markets expected and July’s 47.3. A reading below 50 indicates deflation. By contrast, UK Services PMI came in at 52.5 in August, which was above expectations. The US manufacturing PMI read at 51.3, but it was lower than the 52.0 that markets had expected. The Composite PMI – which adjusts readings to better reflect the broader economy – came in at 45.0, well below expectations of 49.0 and 47.7 in July.

For its part, S&P Global said the decline in production was the fastest since May 2020 and exceeded anything recorded outside the initial epidemic outbreak since the chain began nearly 13 years ago. The data indicates that the US economy is slowing amid rising inflation and higher interest rates at the Federal Reserve.

Signs of slowdown

From a forex market perspective, another sign of a slowdown will dampen investor expectations about the number of interest rate hikes the Fed is willing to deliver over the coming months. Expectations of a rate hike in the cooldown are in turn creating headwinds for the US dollar as it leads to lower bond yields.

Standard & Poor’s Global also said material shortages, delays in delivery, rise in interest rates and strong inflationary pressures have all dampened customer demand. The Fed may be tempted to slow the pace of increases given the report that companies raised their selling prices at the weakest pace in 18 months.

This data suggests a significant slowdown in the US, provided that it tracks GDP closely. “I’m a huge fan of PMIs, but even I would have treated this recession with a pinch of salt,” says independent economist Julian Jessup. “The reason for the weakness was the sharp drop in the services index, which has only a short track record, while the alternative ISM index has held up well,” he added.

Thus, the Fed will read the PMI report with interest, but it will likely not be affected by its rate hike policy. Therefore, despite the decline of the dollar, the general premise of further strength remains.

US new home sales in July were reported to have fallen for the sixth time this year to the slowest pace since early 2016, extending a months-long slump in the housing market fueled by higher borrowing costs and declining demand. Government data on Tuesday showed that purchases of new US single-family homes fell 12.6% to a 511,000 annual pace from 585,000 in June. The median estimate in a Bloomberg survey of economists called for 575,000. Overall, the fall in July sales is the latest example of how the housing market has buckled under the weight of higher prices and higher borrowing costs. Construction has slowed, home purchase orders are down, and more buyers are pulling back from deals.

Inventories are booming amid a decline in demand, which is likely to put downward pressure on home prices in the coming months. And there were 464,000 new homes for sale at the end of the month, the most since 2008. However, 90% of them were either under construction or not yet started.

Data released last week showed that housing starts fell in July to the slowest pace since early 2021, and sales of existing homes – which make up most of the market – fell for the sixth month in a row to the lowest level in more than two years. The New Home Sales report, released by the Bureau of Statistics and the Department of Housing and Urban Development, showed that the median sales price for a new home rose 8.2% from the previous year to $439,400, the slowest pace of price increases since late 2020.

Dollar yen forecast today:

• The general trend of the USD/JPY currency pair is still bullish.
• The currency pair may remain stable around its gains until the reaction from the Jackson Hole symposium and the Federal Reserve’s hints about the future of raising US interest rates, the most important factor for the dollar in achieving its gains.
• Currently, the nearest resistance levels for the currency pair are 137.75 and 138.40, and from there to the historical peak of 140.00.

On the downside and according to the performance on the daily chart, there will be no break in the current trend without the currency pair moving towards the support levels 134.70 and 133.00, respectively.

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• The bullish retracement path of the USD/JPY currency pair this week was capped by testing the resistance level 135.50 before settling around the 135.10 level in the beginning of trading today, Thursday.
• The dollar yen gained further after the release of the minutes of the latest meeting of the US Federal Reserve. and US retail sales figures.
• US central bank officials saw signs of weakness in the US economy at their last meeting, but still described inflation as “unacceptably high” before raising the benchmark interest rate by a significant three-quarters of a point in their quest to slow price increases.

The pace of sales at US retailers was reported unchanged last month as persistently high inflation and rising interest rates forced many Americans to spend more cautiously. Retail purchases were flat after rising 0.8% in June, the Commerce Department reported, and economists had been expecting a slight increase.

However, yesterday’s report contained some positive signs: Excluding autos and auto parts, retail sales rose 0.4% in July. Lower gas prices will likely free up money for people to spend elsewhere. Gasoline sales fell 1.8%, reflecting lower pump prices. Sales of building supplies and garden equipment were halted, as were sales in electronics and hardware stores. Meanwhile, consumers remained wary of spending too much on non-essentials: sales fell 0.5% in supermarkets and 0.6% in clothing stores.

Compared to the previous 12 months, total US retail sales rose 10.3% in July.

Inflation Affecting US Economic Activity

American consumers, whose spending accounts for nearly 70% of US economic activity, remained mostly resilient even as year-round inflation neared four-decade highs, growing economic uncertainty and rising costs for mortgages and money borrowing. However, public spending has weakened, increasingly turning towards things like groceries, and away from less important things like electronics, furniture, and new clothes. The government’s monthly report on retail sales covers about a third of all consumer purchases and does not include spending on most services, from plane prices and apartment rentals to movie tickets and doctor visits. In recent months, Americans have shifted their purchases away from physical goods and more toward travel, hotel accommodations and plane rides.

Inflation continues to be a severe struggle for many families. Although gasoline prices have fallen from their highs, food, rent, used cars and other necessities are becoming much more expensive, exceeding any wage increases that most workers have achieved. Despite the US labor market, which remains strong, the US economy contracted in the first half of 2022, raising fears of a possible recession. Growth has been weakening largely as a result of higher interest rates by the Federal Reserve, which are intended to calm the economy and tame high inflation.

US Dollar Against Japanese Yen Forecast

On the daily chart, technical indicators are heading higher, which provides the momentum for the USD/JPY currency pair. Besides, the momentum factors for the stronger US dollar, which is still a safe haven, and the economic performance of the United States supports the path of tightening the Fed’s policy, and we do not forget that the dollar pair Yen headed towards its highest in 25 years and was the closest to testing the psychological peak of 140.00. Technical indicators have not yet reached overbought levels, so no profit-taking is expected.

On the downside, the closest support levels for the dollar pair are 134.20 and 133.00, respectively. The US dollar will be affected today by the announcement of the Philadelphia manufacturing index, the number of jobless claims, and then the US existing home sales.

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