USD/JPY consolidates around mid-108s after a sharp 40-pips drop

USD/JPY is consolidating a sharp correction from two-month highs of 108.85, as the bears lick wounds around the midpoint of the 108 handle.

The spot, currently, loses 0.12% to trade at 108.52, having hit a daily low of 108.43 in the last hour. An extension of the corrective mode to the downside cannot be ruled out in spot, given the upsurge following a technical breakout on Tuesday.

The ongoing optimism over the global economic recovery and the resultant risk-on rally in the equities emerged as the main driver for the recent rally in USD/JPY.

The bullish growth narrative combined with the technical breakout on the hourly chart helped the major breakthrough the two-week long-range trade.

However, the latest leg down in the pair could be likely associated to the relentless selling seen in the US dollar across the board, as the risk-on mood dampens the safe-haven appeal of the greenback.

Moreover, the yen picked up a small bid on the reports that the Bank of Japan (BOJ) is considering doubling the financial aid for the small business hit by the coronavirus pandemic, collaborating with the USD/JPY drop.

Over the last hour, the rates have stabilized amid a tepid bounce attempted by the greenback across its main competitors, with the US dollar index back above 97.50 from fresh three-month lows of 97.41.

Attention now turns towards the US ISM Services PMI and Factory Orders data for further incentives while risk trends will continue to have a major bearing on the spot.

USD/JPY technical levels to watch

To the downside, the next supports are aligned at 108.39 (200-DMA), 108.20 (former resistance) and 108.04 (5-DMA). Should the bulls regain poise, the two-month highs will be retested en route 109.00 (round number) and 109.14 (classic daily R1).

USD/JPY additional levels