USD/JPY drops to fresh five-day lows below 108.50

• Business sentiment in Japan improved slightly in November.
• US Dollar Index goes into consolidation after Friday's rebound.
• Wall Street looks to start the day flat. 

After losing its momentum ahead of the 110 handle at the start of the previous week, the USD/JPY pair reversed its course and closed with a weekly loss of around 100 pips. With the market action turning subdued ahead of the important macroeconomic events, the pair struggles to stage a recovery on Monday and was last seen trading at 108.49, a few pips above the five-day low that it set at 108.43 in the last hour.

The data from at the start of the week showed that the business sentiment improved slightly in November with the Eco Watchers Survey's both the Outlook and the Current indexes coming in slightly better than their October readings.

Focus shifts to US-China trade talks and FOMC

Investors this week will remain focused on fresh developments surrounding the US-China trade talks. If sides could reach an agreement and sign the phase-one of the trade deal ahead of the US tariff hike on Chinese imports on December 15th, a relief rally could cause the JPY to lose interest as a safe-haven and help the pair gain traction. On the other hand, further escalation of the tension is likely to cause the JPY to outperform its rivals.

On the other hand, the Federal Open Market Committee (FOMC) will be announcing its monetary policy decisions on Wednesday. Although the FOMC is not expected to make any changes to its policy rate, it will be interesting to see how the Fed assesses the upbeat Gross Domestic Product (GDP) and Nonfarm Payrolls (NFP) data. 

On Friday, the US Bureau of Labor Statistics reported that Nonfarm Payrolls increased by 266,000 in November to beat the market expectation of 180,000 and provided a boost to the US Dollar Index, which spent the first half of the week under bearish pressure. As of writing, the index was down 0.1% on the day at 97.58.

In the meantime, the S&P 500 futures are virtually unchanged on the day, suggesting that Wall Street is likely to open flat to reaffirm the neutral market mood.

Technical levels to watch for

USD/JPY