USD/JPY Fundamental Daily Forecast – Strengthens Over 113.356, Weakens Under 112.978

The Dollar/Yen traded in a tight range throughout the session on Monday with the price action primarily driven by below average volume as most major currency players took to the sidelines before U.S. mid-term elections on Tuesday that may fuel the return of heightened volatility to the global market place.

At 2029 GMT, the USD/JPY is trading 113.197, up 0.019 or +0.02%.

The tight trading range and low volume suggests most of the price activity on Monday was position-squaring as investors head into Tuesday’s mid-term elections with no particular bias due to the polls showing the results too difficult to predict. The latest estimates show the Democratic Party facing a strong chance of winning control of the U.S. House of Representatives, with Republicans likely to keep the Senate.

Technically, the USD/JPY is in an uptrend on the daily chart. A trade through 113.384 will signal a resumption of the uptrend while a trade through 112.520 will change the main trend to down.

The daily chart shows that taking out 113.384 with conviction could trigger an acceleration to the upside since the next major resistance doesn’t come in until 114.580.

A change in trend to down is likely to drive the USD/JPY toward the October 26 main bottom at 111.375. Sellers would have to take out this level to trigger an acceleration to the downside.

The main range is the August 21 bottom at 109.770 and the October 3 top at 114.580. Its retracement zone at 112.175 to 111.607 is a key support zone. This zone stopped the selling on October 15 at 111.622 and on October 26 at 111.375.

The short-term range is 114.580 to 111.375. Its retracement zone at 112.978 to 113.356. This zone has been acting like resistance the past four sessions. The next move in the USD/JPY is likely to be determined by trader reaction to this zone.

Forecast

A rangebound trade can only mean two things:  trader indecision and impending volatility. Of course, the volatility is likely to be fueled by the results of the election.

We’re going into Tuesday taking a simple approach. If the Republican Party keeps control of the House and Senate than demand for risk is likely to soar. This should be bullish for the Dollar/Yen because of the carry trade.

If power in the House and Senate shifts to the Democratic Party the demand for risk should drop, sending stocks sharply lower. This should pressure the USD/JPY because investors will use the Japanese Yen as a safe-haven asset.

Mixed results should also cause a volatility reaction, but instead of the direction of the USD/JPY being one-sided, it could produce a two-sided trade. However, I do think that the risk is to the downside because losing the House despite winning the Senate will still weaken the position of the Republicans and this won’t be good for the global equity markets.