USD/JPY drops below 106 as dismal PMI data weigh on USD

After spending the first day of the week fluctuating in a very tight range above the 106 handle, the USD/JPY pair came under strong selling pressure in the last couple of hours and is now losing 0.32% on the day at 105.88.

With US investors returning from the long Labor Day weekend, major equity indexes in the US started the day in the negative territory as the lack of progress in the US-China trade dispute revived concerns over the potential negative impact of a protracted trade war on the economy.

US manufacturing sector loses momentum

Later in the day, the Manufacturing PMI reports published by the IHS Markit and the Institue for Supply Management (ISM) both confirmed the contraction in the sector's business activity to remind investors of a possible recession in the US and triggered an intense flight-to-safety in markets. The 10-year US Treasury bond yield fell sharply after the data and is now closing in on the all-time lows, losing more than 4% on the day while Wall Street's three main indexes all erase around 1%.

The disappointing PMI data weighed on the Greenback and forced the US Dollar Index to return to the 99 mark from the multi-year highs that it set at 99.37 earlier today.

Commenting on the data, "The ISM manufacturing index has come in at 49.1 for August versus 51.2 in July. This is the first sub-50 reading (the expansion/contraction boundary) since August 2016 and is the weakest figure since January 2016," said ING analysts.

"The consensus had expected a slight rise based on the regional surveys already published and as the chart below shows, this is a clear disappointment that will provide further fuel to the market and President Trump’s desire for further Federal Reserve interest rate cuts."

In the early trading hours of the Asian session on Wednesday, the IHS Markit will release the Services PMI report from Japan.

Technical levels to watch for