USD/JPY struggles to retrace losses, stays calm below 110

The USD/JPY pair, which started the week with a 70-pip bearish gap at 109.55, pushed lower during the European session before finding support at 109.40. However, the pair is having a difficult time making a meaningful recovery and is now trading at 109.60, losing 0.6% on the day.

The pair's price action on Monday seems to be driven by the market sentiment. Over the weekend, North Korea announced that it successfully tested a hydrogen bomb, forcing investors to seek refuge in safer assets like the JPY. Although some fresh headlines in the second half of the day suggested that South Korea and the U.S. are taking bold steps to deal with this situation, the pair's recovery remained limited amid a thin trading volume due to the Labor Day holiday in the U.S.

In a statement on Monday, South Korea's presidential office said that South Korean President Moon and US President Donald Trump agreed to lift the warhead weight limit on South Korea's missiles and urged the U.N. to consider halting oil shipments to N. Korea. Furthermore, following the U.N. Security Council meeting, Chinese U.N. Ambassador said that China wouldn't allow a war on the Korean peninsula.

• S. Korea's Moon: Halting oil shipments to N. Korea should be considered closely by UN
• China's U.N. envoy: Beijing will 'never allow chaos and war on the Korean peninsula'
• Russia's U.N. envoy: Military solutions cannot settle Korean peninsula issues

There won't be any data featured from Japan on Tuesday and the pair's movements should continue to be impacted by the market sentiment. Later in the day, FOMC members Brainard, Kashkari, and Kaplan will be giving speeches in the NA session. 

Technical outlook

110.00 (psychological level) remains as a critical technical resistance ahead of 110.70 (50-DMA) and 111.75 (200-DMA). On the downside, supports could be seen at 109.40 (daily low), 109 (psychological level) and 108.25 (Aug. 29 low). On the daily graph, the RSI indicator moved slightly below the 50 mark, but this move is not strong enough to suggest that the bearish momentum is building up.

• USD/JPY expected to stay within range – Danske Bank