USD/JPY clings to modest gains near mid-105.00s, lacks follow-through

• USD/JPY managed to regain some positive traction on Thursday amid fading safe-haven demand.
• Hopes of additional US fiscal stimulus remained supportive of the prevalent upbeat market mood.
• Investors now look forward to the US economic docket for some meaningful trading opportunities.

The USD/JPY pair edged higher during the Asian session and recovered a part of the previous day’s modest losses, albeit lacked any strong follow-through beyond mid-105.00s.

The global risk sentiment got a strong boost on the back of renewed hopes for the US fiscal stimulus. This was evident from a bullish trading sentiment around the equity markets, which undermined the Japanese yen’s safe-haven status and assisted the USD/JPY pair to regain some traction on Thursday. However, a softer tone surrounding the US dollar kept a lid on any further gains for the major.

The US Treasury Secretary Steven Mnuchin told reporters that talks with House Speaker Nancy Pelosi made a lot of progress on long-awaited COVID-19 relief legislation. Meanwhile, Senate Majority Mitch McConnell said that the two sides remain far apart. The conflicting messages held investors from placing aggressive bullish bets, indicating that plenty of underlying caution still remains.

Meanwhile, the downside for the greenback is likely to remain cushioned on the back of robust US macro data released on Wednesday. The ADP reported that private-sector employment grew by 749K in September as compared to market expectations of 650K. Adding to this, Chicago PMI surged to the highest level since the end of 2018 in September and reflected the resilience of the broader US economy.

Market participants now look forward to Thursday’s US economic docket, featuring the releases of the final version of the September Manufacturing PMI, Initial Weekly Jobless Claims, core PCE Price Index and the ISM Manufacturing PMI. The data, along with developments over the next round of the US fiscal stimulus will influence the USD price dynamics and produce some meaningful trading opportunities.

Barring any immediate reaction, the USD/JPY pair is more likely to remain confined in a range as investors might refrain from placing any aggressive bets ahead of Friday’s US monthly jobs report (NFP). Moreover, the recent price action constituted the formation of a rectangle, making it prudent to wait for a break in either direction before positioning for the next leg of a directional move.

Technical levels to watch