USD/JPY clings to gains below 105.00 mark, lacks follow-through

The USD/JPY pair maintained its bid tone through the first half of the European trading action, albeit lacked bullish conviction and remained below the key 105.00 psychological mark.

Following the previous session's negative move, the pair managed to regain traction on the first day of a new trading week and was being supported by a goodish pickup in the US dollar demand. Growing market worries about the continuous surge in new coronavirus cases in Europe and the United States could hinder the global economic recovery. This, in turn, benefitted the greenback's status as the global reserve currency and extended some support to the USD/JPY pair.

Meanwhile, concerns about the imposition of stricter lockdown measures to curb the second wave of COVID-19 cases, coupled with receding hopes for a pre-election fiscal deal and weighed on investors' sentiment. This was evident from a fresh leg down in the equity markets, which underpinned the Japanese yen's safe-haven demand. The anti-risk flow held bulls from placing aggressive bets and was seen as a key factor that capped any further gains for the USD/JPY pair.

It is worth recalling that the US House Speaker Nancy Pelosi remained optimistic on the stimulus talks and said that she expected a White House response on Monday regarding the spending plan. Investors, however, seemed unconvinced that US lawmakers will be able to strike a deal before the US presidential election on November 3 amid strong opposition from Senate Republicans.

This makes it prudent to wait for some strong follow-through buying beyond the 105.00 mark before confirming that the USD/JPY pair might have actually bottomed out in the near-term. The pair might then build on its recent bounce from one-month lows, around the 104.35 region touched last Wednesday, and aim back to retest the 105.40-50 supply zone.

Technical levels to watch