USD/JPY trades with modest gains around 109.30-35 region, lacks follow-through

The USD/JPY pair traded with a mild positive bias through the early European session, albeit lacked any strong follow-through buying and remained capped below mid-109.00s. The pair was last seen hovering around the 109.30-35 region, up 0.15% for the day.

The pair gained some positive traction during the first half of the trading action on Thursday and was supported by the prevalent risk-on mood, which tends to undermine the safe-haven Japanese yen. Hopes for a strong global economic recovery from the pandemic remained supportive of the underlying bullish sentiment in the financial markets.

Apart from this, worries that the recent surge in COVID-19 cases could hinder Japan's fragile economic recovery also acted as a headwind for the JPY and extended some support to the USD/JPY pair. Earlier this Thursday, Tokyo governor, Yuriko Koike said that the Japanese capital is not in a stage where they can afford to lift the state of emergency measures.

The supporting factors, to a larger extent, were offset by the emergence of some fresh selling around the US dollar. This, in turn, held bulls from placing aggressive bets and kept a lid on any meaningful upside for the USD/JPY pair. The USD retreated further from the two-week tops set on Wednesday and was weighed down by dovish Fed expectations.

Wednesday's rather unimpressive US macro releases – the ADP report and ISM Services PMI – reinforced the market view that the Fed will keep interest rates low for a longer period. This, along with a softer tone surrounding the US Treasury bond yields, further undermined the greenback and warrants caution before positioning for any strong gains.

Investors might also prefer to wait on the sidelines ahead of Friday's release of the closely-watched US monthly jobs report, popularly known as NFP. This may provide clues on when the Fed would scale back its stimulus, which, in turn, should assist investors to determine the next leg of a directional move for the USD/JPY pair.

In the meantime, Thursday's release of the Initial Weekly Jobless Claims data from the US will be looked upon for some impetus. Apart from this, the US bond yields, might influence the USD and provide some impetus to the USD/JPY pair. Traders might further take cues from the broader market risk sentiment to grab some short-term opportunities.

Technical levels to watch