The USDJPY broke a four-day decline on Friday, recovering slightly above the 107.3 mark after finding support at 106.50. Rising optimism in the market combined with a week of poor economic data releases for Japan helped the dollar regain a foothold against the yen before retreating at the 107.50 resistance level.

Solid gains in US equity markets on Friday helped boost the USD and increase risk-on flows, triggering a decline in demand for safe haven assets. Gold traded flat while the Japanese yen dipped slightly. This was in contrast to Thursday’s market activity where investors sold off riskier assets after indications that a potential second wave of covid-19 was threatening the US.

Overall market volatility remains high and continues to be strongly influenced by headlines on covid-19 infectivity rates. New clusters were declared mid-week in China, India, and parts of Africa, prompting investors to take a cautious stance on the expected speedy recovery of the global economy. Per the World Health Organisation, the only sure-fire way for a fast recovery would be the discovery of a vaccine or effective remedy to the virus, without such solution, economic growth will remain at risk from further confinement or travel restrictions.

Building on the cautious statements by the WHO, the US Fed declared any recovery will likely be slow, with the central bank maintaining its view of low interest rates to remain relevant until 2022. On the other hand, investors were quick to jump on the fast recovery train given the strong outperformance of US labour data in the non-farm payrolls released in the previous week. Conflicting economic indicators will likely be the norm in the short term, fuelling speculation amongst traders.

From a technical point of view, the USDJPY has pulled back from oversold levels but failed to firmly settle above the 107.354 resistance-turned support level. The bullish target to regain control will be a close above the 0.382 Fibonacci retracement line around the 108 mark. Failing to do so would condemn the pair to further bearish momentum in the short run. Should the pair manage to hold above the 106.50 mark, any pullback would likely present a buying opportunity. Traders may look to exploit the sideways price action within the 108 to 106.50 range as the USDJPY continues to move in a consolidation pattern.

Support & Resistance Levels:

R3-109.520   R2-108.620   R1-107.600
S1-107.000   S2-106.500    S3-106.025

Analyzed by：Thibault Moirez, Independent Analyst