USD/JPY fails to break above 107, returns to 106.30 as focus shifts to stocks

• Major equity indexes in Europe rebound on Tuesday
• US Dollar Index recovers above 97.50 following deep slump.
• Wall Street looks to open in positive territory.

The USD/JPY pair dropped to its lowest level since the flash market crash witnessed back in early January at 105.53 earlier today but was able to stage a decisive recovery. However, the pair failed to hold above the 107 handle and started to retrace its daily rally. As of writing, the pair was up 0.35% on the day at 106.30.

Risk-aversion boosts demand for safe assets

Concerns over a currency war on top of the trade conflict after China let the USD/CNY exchange rate rise above the critical 7 mark on Monday hurt the market sentiment and allowed traditional safe-havens such as Treasury bonds, gold, and JPY find demand. The 10-year US-Treasury bond yield slumped to its lowest level since October 2016 and the troy ounce of gold jumped to its highest level in more than six years at $1475.

With China taking steps to stop the CNY selloff, the risk sentiment improved slightly and allowed markets to make a correction on Tuesday.

After getting heavily hit by risk-aversion, major European equity indexes reversed their direction today with the Euro Stoxx 50 and Germany's DAX both adding around 0.7% on the day. Similarly, the S&P 500 Futures is up nearly 1% today, suggesting that Wall Street is likely to start the day with strong gains.

Meanwhile, after posting losses for three straight days, the US Dollar Index floats in the positive territory above 97.50, helping the pair cling to its gains for the time being. The lack of significant macroeconomic data releases from the US today will allow the market's risk-perception to continue to drive the pair's action. A decisive recovery in Wall Street's main indexes could help the pair edge higher in the second half of the day.

Technical levels to watch for