• Resurgent USD demand assisted USD/JPY to recover further from multi-month lows.
• A turnaround in the global risk sentiment might keep a lid on any further strong gains.

The USD/JPY pair bounced around 25-30 pips from Asian session lows and was last seen hovering near daily tops, just above mid-103.00s.

The pair opened with a modest bullish gap on the first day of a new trading week and recovered further from nine-month lows, around the 102.85 region touched last Thursday. The imposition of tougher COVID-19 restrictions in the UK to contain the fast-spreading new variant of coronavirus provided a strong boost to the US dollar's status as the global reserve currency.

Adding to this, news that Prime Minister Yoshihide Suga told Finance Ministry officials to make sure that the yen-dollar exchange rate does not cross the 100 mark remained supportive. That said, a turnaround in the global risk sentiment extended some support to the safe-haven Japanese yen and seemed to be the only factor capping gains for the USD/JPY pair, at least for now.

Meanwhile, fresh COVID-19 jitters come on the back of a deadlock in the post-Brexit trade negotiations and weighed on investors' sentiment. This, in turn, overshadowed the recent optimism over the deal on a long-awaited US stimulus bill and an emergency use approval for Moderna's COVID-19 vaccine. The downbeat market mood was evident from a sharp pullback in the equity markets.

This makes it prudent to wait for some strong follow-through buying before confirming that the USD/JPY pair has bottomed out in the near-term and positioning for any further appreciating move. Nevertheless, the pair, so far, has managed to hold in the positive territory for the second consecutive session and remains at the mercy of the USD price dynamics amid absent relevant market moving economic releases.

Technical levels to watch