USD/JPY sticks to modest gains above 135.00, lacks bullish conviction ahead of US data

• USD/JPY gains some positive traction and snaps a five-day losing streak to a multi-month low.
• A modest USD recovery from over a five-month low is seen as a key factor offering support.
• Expectations for smaller Fed rate hikes hold back the USD bulls from placing aggressive bets.
• Traders now look forward to the release of the US ISM Services PMI for short-term impetus.

The USD/JPY pair attracts some buyers near the 134.15-134.10 area on Monday and snaps a five-day losing streak to its lowest level since August 16. Spot prices, however, retreat a few pips from the daily top and slide back closer to the 135.00 psychological mark heading into the North American session.

The US Dollar stages a modest recovery from over a five-month low touched earlier today and turns out to be a key factor acting as a tailwind for the USD/JPY pair. The upbeat US monthly jobs report released on Friday, including an upside surprise in wages, reaffirmed expectations that the Federal Reserve will continue to hike interest rates in coming months. This, in turn, helps ease the recent bearish pressure surrounding the Greenback amid extremely oversold conditions.

Apart from this, the optimism over the easing of COVID-19 restrictions in China undermines the safe-haven Japanese Yen and further offers support to the USD/JPY pair. That said, expectations that the US central bank will begin to slow the pace of its policy tightening as soon as in the December meeting is holding back the USD bulls from placing aggressive bets. Furthermore, a weaker risk tone helps limit losses for the safe-haven JPY and seems to cap the major.

The market sentiment remains fragile amid growing worries about a deeper global economic downturn. This, in turn, warrants some caution before confirming that the USD/JPY pair has formed a near-term bottom and positioning for any meaningful recovery. Even from a technical perspective, Friday's break below the very important 200-day SMA for the first time since February 2021 supports prospects for an extension of the recent sharp pullback from a 32-year peak.

Hence, any subsequent positive move might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly. Traders now look forward to the release of the US ISM Services PMI. Apart from this, the US bond yields will influence the USD price dynamics and provide some impetus to the USD/JPY pair. This, along with the broader risk sentiment, might further contribute to producing short-term trading opportunities around the major.

Technical levels to watch