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USD/JPY struggles to hold above 113 amid weak market sentiment

  • USD/JPY recovers from 4-week lows, looks to close third straight day lower.
  • DXY makes a technical correction, loses momentum ahead of 94.
  • Wall Street continues to suffer losses on tax reform uncertainty.

The USD/JPY pair lost nearly 100-pips on Wednesday and refreshed its lowest level since October 19 at 112.47 before staging a modest recovery in the US afternoon. Although the pair rose to 113.20, it struggled to preserve its momentum and was last seen trading at 112.95, down 0.45% on the day.

JPY continues to benefit from the risk-off environment

The market reaction to today's mixed data from the U.S. was equally mixed. Following a sharp drop to 93.30, the US Dollar Index turned positive on the day at 93.80 before going into a consolidation phase near Tuesday's closing level of 93.70. The annual inflation measured by the CPI growth eased to 2% in October from 2.2% in September and came in line with market expectations. Other data showed that retail sales increased by a dismal 0.2% following the 1.9% spike witnessed in September, which was impacted by hurricanes Irma and Harvey.

  • US: CPI for all items increases 0.1% in October as shelter index rises
  • US: Retail sales rose 0.2% in October

Despite the DXY fluctuation, however, the pair stays under pressure as the demand for traditional safe havens such as the JPY remains high amid the ongoing uncertainty surrounding the tax bill. In fact, major equity indexes are on track to close the fifth session in a row with losses. At the moment, both the Dow Jones Industrial Average and the S&P 500 indexes are down 0.5% on the day while the 10-year T-bond is losing 2%.

House Republicans are expected to vote on their tax reform bill on Thursday. Earlier in the session, the chairman of the House of Representatives' tax-writing committee Kevin Brady gave an interview to Fox News. Summarizing his comments, "Brady on Wednesday predicted there will be strong support for repealing the Obamacare individual healthcare mandate when House-Senate negotiators hash out differences in their tax reform plans," Reuters reported.

Technical outlook

Valeria Bednarik, Chief Analyst at FXStreet, writes, "from a technical point of view, the risk remains towards the downside, as in the 4 hours chart the price is below its 100 and 200 SMAs for the first time in over a month and a half, with the largest now acting as immediate resistance around 113.25. Indicators in the mentioned chart have bounced from oversold readings but lost upward strength within bearish territory, supporting a bearish extension for the upcoming sessions."

According to the analyst, supports could be seen at 112.90, 112.50 and 112.10 while resistances align at 113.25, 113.60 and 114.05.

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