USD/JPY forecast: Election showdown and Fed decision set the stage for volatility. Nov 4, 2024

With USD/JPY caught between the US election and Fed decision, volatility is set to spike. Can Treasury yields predict the next big move, or will Bank of Japan intervention steal the show? Get the key insights here.

By :David Scutt, Market Analyst

  • 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 favouring 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 signalled 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.

Click the website link below to get our exclusive Guide to USD/JPY trading in Q4 2024.

https://www.cityindex.com/en-au/market-outlooks-2024/Q4-usd-jpy-outlook/

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.

– Written by David Scutt

Follow David on Twitter @scutty

https://www.cityindex.com/en-au/news-and-analysis/usd-jpy-forecast-election-showdown-and-fed-decision-set-the-stage-for-volatility/

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.