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USD/JPY pares the drop from Friday, what’s next?

USD/JPY recovers after the drop to 105.00 on Friday

News of Trump testing positive for the coronavirus at the end of last week sent risk assets into a bit of a tailspin as it introduced more uncertainty to the US election race.
But as more reports surface since the weekend have suggested that his health situation is less severe than feared, the market is feeling more cheery to start the new week.
And that has helped USD/JPY to retrace the move lower from last week even further, with buyers now pushing towards the 105.70 level and paring the drop already.
So, what’s next for the pair?
Of note, buyers have pushed back above both key hourly moving averages in trading today so that at least suggests the near-term bias is more bullish now.
However, near-term resistance from the recent swing region around 105.70-80 has been limiting gains over the past week or so and that is the first key test for buyers now.
A lot still rests on the risk mood in the market and the push higher today comes as US futures are also looking more optimistic on news that Trump could even get out of the hospital as early as today. S&P 500 futures are up by ~0.5% currently.
In that regard, US election risk is going to be the key factor driving sentiment over the next few weeks. The market may be responding more positively to Trump’s health condition now but if that becomes ‘old news’ then the focus will shift back to the polling numbers.
Biden is seen as having an edge still for now and I’m still not convinced that the market has settled on how to price that all in, if he is even to be regarded as a shoo-in.
There are some quarters of the market saying that a Biden win may not be all too bad for markets in general, but his take on taxes could weigh on near-term sentiment.
In any case, I think the market will take more comfort if the polls suggest that the election isn’t going to be a closely contested one. That will leave less room for complications past the voting day in November so that to me, is more of the spot to watch.
Back to how that ties back to USD/JPY, if the market feels more comfortable in pricing in a less chaotic election race, that should bode well for risk assets and for buyers.
The 105.70-80 resistance is the near-term level to watch for now but if that gives way, then buyers have a clear path towards the early September highs near 106.50.

Source: Technical analysis

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