- USD/JPY driven by US rate outlook; election and Fed decision are the key risks
- Republican red wave generates largest upside risk, divided Congress may prompt downside
- Fed cut expected; dovish tone could add downside pressure
- BOJ intervention possible if volatility spikes
Overview
USD/JPY continues to be driven by the US interest rate outlook, putting focus on the US Presidential election and the Federal Reserve FOMC policy decision this week. Expect volatility around both events, raising the risk of Bank of Japan intervention.
Fiscal Policy in Focus
While USD/JPY is mainly driven by the US interest rate outlook, recent movements suggest it's the belly of the US Treasury curve (2-10 years) that's been particularly influential over the past month. The correlation with 10-year Treasury yields sits at 0.94, slightly stronger than shorter-term yields or Fed funds futures.
Given the short end of the Treasury curve largely reflects Fed rate expectations, the stronger correlation with longer-dated yields hints that speculation over the US election outcome could be more relevant to USD/JPY near term.
Source: TradingView
Scenario Analysis: Potential Election Results
With betting markets favoring Republican candidate Donald Trump, the election carries asymmetric directional risks. It's tough to say what's priced in, but a Kamala Harris victory may arguably deliver the largest market reaction as traders unwind Trump-based positions.
Here's the anticipated USD/JPY reaction depending on potential election outcomes.
- Republican Red Wave (Trump victory, Senate/House Republican-controlled): USD/JPY likely rallies as the Treasury curve steepens, given the higher chance of expansionary fiscal policy.
- Democrat Blue Wave (Harris victory, Senate/House Democrat-controlled): USD/JPY upside, but not as strong as a Republican sweep given pre-election policy signals.
- Trump Victory, Split Congress: Policy gridlock could slow growth, weaken inflation, and increase chances of more Fed easing. Treasury yields are likely to fall, pulling USD/JPY lower.
- Harris Victory, Split Congress: Most bearish outcome for USD/JPY given likelihood of sizeable falls in US Treasury yields.
Fed: Powell's Tone in Focus
A Federal Reserve rate decision normally dominates any week in which it falls, but not this week. Instead, traders face the prospect of the announcement arriving before the election outcome is known, potentially adding an additional layer of uncertainty around the event.
While a 25 bp rate cut is expected, focus will be on the FOMC statement and Jerome Powell’s post-meeting press conference.
Source: TradingView
At the September meeting, the Fed cut rates by 50 bp and signaled another 50 bp in cuts this year. But since then, data has been strong, prompting the market to price in fewer cuts. Less than five 25-point cuts are now expected from October 2024 to December 2025.
The question is whether the Fed's statement reflect this improved outlook? If Powell maintains a dovish tone, expect short-end Treasury yields to fall, which could push USD/JPY lower.
Data Calendar Takes a Backseat
Source: TradingView
This week, economic data takes a backseat to the Fed and the election. Tuesday’s ISM Services PMI may be worth a glance, but that's about it. Treasury auctions, however, could provide insight into buyer demand post-election, making them potentially more important than any data releases.
Source: TradingView
In Japan, wage and household spending data will offer an update on whether wage pressures are holding up, boosting the consumption outlook—but it's a secondary consideration.
Source: TradingView
USD/JPY Showing Signs of Fatigue
USD/JPY looks indecisive and exhausted after a substantial rally from August lows. It’s now time to see if the economic and political outlook aligns with market expectations, providing a potential catalyst to spark renewed upside. If not, downside could materialise quickly. 
Source: TradingView
Momentum indicators show signs of weakness: MACD is threatening to cross over, and RSI (14) has slightly diverged from price, suggesting downside risks are building.
Buyers are active on dips toward the 200-day moving average which intersects this week with former uptrend resistance that is now providing support. This combination may keep USD/JPY range-bound heading into the election and Fed decision.
Key levels to watch include:
- Support: 150.90, 147.20
- Resistance:153.88, 155.36,160.23.
While extreme volatility in USD/JPY could trigger warnings from Japan’s Ministry of Finance, if those warnings are ignored, the risk of Bank of Japan intervention rises.