Technical Tuesday: Russell and USD/JPY

USD/JPY drops as US PMIs remain below contraction threshold again

Today, we had more evidence of a slowing US economy as the preliminary PMI data remained below the 50.0 level again, even if the headline numbers managed to beat expectations ever so slightly.

The S&P Global US Manufacturing PMI came in at 46.8 vs. 46.2 prior to register its 7th monthly print below 50, while the Services PMI scored a hattrick of sub-50 prints (46.6 vs. 44.7 prior). Companies once again highlighted subdued customer demand, with the impact of high inflation hurting customer spending.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said:

“The US economy has started 2023 on a disappointingly soft note, with business activity contracting sharply again in January. Although moderating compared to December, the rate of decline is among the steepest seen since the global financial crisis, reflecting falling activity across both manufacturing and services.

As a result of the weakness in US data, the USD/JPY has dropped sharply off its earlier highs, to test the key 130 handle. A closing break below 130.00 would signal the resumption of the downward trend.

Meanwhile, if the dollar stages a surprise comeback later, it will still need to close above the bearish trend line to invalidate its recent bearish bias. So, the USD/JPY is definitely the key FX pair to watch this week.

Russell trying to break key resistance

The major US indices have bounced off their earlier lows, as the weakness in data means the Fed would be more inclined to stop its hiking cycle sooner. Traders were also unwilling to bet against the market ahead of the big tech earnings. Microsoft reports its results after the closing bell today along with Texas Instruments. Tomorrow after the close Tesla will report its results.

So, despite more signs emerging that the US is potentially heading into a recession, the markets continue to rise. You would think this would be bad news for small-cap, domestically focused stocks. Yet despite concerns over a looming recession, the Russell has enjoyed a decent recovery so far in 2021, rising more than 6% to outperform the S&P’s 4% rise.

So, given that the bad news continues to be shrugged off, will the Russell manage to break THIS important resistance band starting around 1890?

If it fails to break the above resistance zone, it will still need to create a bearish reversal to encourage the bears to step in. For example, by dropping below key support 1830.