USD/JPY clings to gains above 106 on recovering sentiment

• Major European equity indexes gain traction on Wednesday.
• The 10-year US Treasury bond yield recovers Tuesday's losses.
• US Dollar Index extends slide below 99 handle.

Despite the broad-based USD strength, the USD/JPY pair, which erased more than 30 pips on Tuesday, reversed its direction today as the recovering market sentiment makes it difficult for the safe-haven JPY to find demand. As of writing, the pair was trading at 106.23, rising 0.27% on a daily basis.

The disappointing PMI data from the US on Tuesday revealed contraction in the manufacturing sector in August and revived concerns over the possibility of the US economy going into a recession to trigger heavy risk-off flows. The 10-year US Treasury bond yield turned south and dropped to its lowest level in more than three years and weighed on the pair. Moreover, major equity indexes opened in the negative territory and closed with modest losses.

Risk-appetite returns on Wednesday

However, the lack of major developments surrounding the US-China trade conflict and easing concerns over a no-deal Brexit allowed market sentiment to turn positive, once again, on Wednesday. As of writing, the 10-year US T-bond yield is up more than 2% and major European equity indexes are posting decisive gains to confirm the risk-on atmosphere.

On the other hand, rising expectations of the Federal Reserve opting out for an aggressive rate cut in this month's meeting following the dismal data hurts the Greenback and caps the pair's gains for the time being. At the moment, the US Dollar Index is erasing 0.35% on the day at 98.62. 

Later in the session, New York Fed President Williams will be delivering a speech and the IBD/TIPP Economic Optimism Index will be looked upon for fresh impetus.

Technical levels to watch for