USD/JPY drops to near 2-week lows amid escalating US-China tensions

• USD/JPY comes under some heavy selling pressure amid worsening US-China relations.
• The downfall confirms a stiff resistance near 50-day SMA, just ahead of the 108.00 mark.
• Friday’s key focus will be on Trump’s response to China’s security law for Hong Kong.

The USD/JPY pair dived to near two-week lows in the last hour, albeit managed to find some support ahead of the 107.00 round-figure mark.

Having repeatedly failed to make it through 50-day SMA hurdle, ahead of the 108.00 round-figure mark, the pair witnessed some aggressive selling on Friday and broke down of a near two-week-old trading range. Concerns about worsening US-China relations benefitted the Japanese yen's safe-haven status and turned out to be one of the key factors exerting pressure on the USD/JPY pair.

China’s parliament on Thursday endorsed a national security law for Hong Kong and raised fears about a further escalation in diplomatic tensions between the world's two largest economies. This, in turn, weighed on investors' sentiment, which overshadowed the recent optimism over a potential COVID-19 vaccine and hopes of a sharp V-shaped recovery for the global economy.

On the other hand, the bearish pressure surrounding the US dollar remained unabated, instead was further fueled by a fresh leg down in the US Treasury bond yields. This, in turn, inspired bearish traders and contributed to the USD/JPY pair's offered tone through the Asian session.

The pair dropped to its lowest level since May 18, though the downside remained limited, at least for the time being. Investors now seemed reluctant to place any aggressive bets, rather preferred to wait for the US President Donald Trump's news conference regarding China's move to tighten control over the city of Hong Kong.

In the meantime, traders are likely to take cues from Friday's US economic docket – featuring the release of Core PCE Price Index, Personal Income/Spending data, Goods Trade Balance figures and will be followed by Chicago PMI and revised Michigan Consumer Sentiment Index.

Technical levels to watch

USD/JPY