USD/JPY Fundamental Weekly Forecast – Strengthens if Republicans Win, Weakens if Power Shifts to Democratic Party

The strengthening U.S. economy announced its presence with authority, driving the Dollar/Yen sharply higher last week. After weakening earlier in the month due to heightened volatility in the global equity markets, the Dollar/Yen posted a solid gain last week as investors shifted their focus to the divergence in the monetary policies of the hawkish U.S. Federal Reserve and the dovish Bank of Japan.

Last week, the USD/JPY settled at 113.200, up 1.305 or +1.17%.

The Bank of Japan (BOJ) created more pressure for the Japanese Yen last week when it decided to leave interest rates unchanged while revising down inflation forecasts. This was the latest sign it has failed to make any progress towards it two-percent target despite several years of massive stimulus and other forms of monetary policy easing.

Additionally, BOJ Governor Kuroda also said the central bank was paying close attention to several global issues, adding that a lingering trade dispute between the United States and China could affect the Japanese economy.

The U.S. Dollar was boosted last week by solid economic data that likely kept the Fed on track for a December rate hike and at least three more in 2019.

The Conference Board’s Consumer Confidence report came in at 137.9, beating the 136.3 estimate. The previous month was revised lower to 135.3, but this didn’t matter to investors.

The ISM Manufacturing PMI came in lower than expected at 57.7, versus a 59.0 forecast.

Friday’s U.S. jobs report for October showed the Non-Farm employment Change rising by 250K, versus a 194K forecast. However, the previous month was revised lower to 118K. The Unemployment Rate was 3.7% as expected. Average Hourly Earnings came in at 0.2%. Wages are up 3.14 percent over the past 12 months through the end of October.

Forecast

There are no major reports from Japan this week, which means all eyes will be focused on fresh U.S. economic news, the latest Fed interest rate and monetary policy decisions, and most of all the impact of the U.S. Mid-Term Election results.

In the U.S., on Monday, ISM Non-Manufacturing PMI is expected to come in at 59.3, down from 61.6. Friday’s Producer Price Index report is expected to show producer price inflation had risen 0.3% in October.

The U.S. Federal Reserve is widely expected to leave interest rates unchanged on Wednesday. Traders will be looking for any comments on recent stock market volatility, the robust jobs market and rising inflation.

Overall, the divergence between the monetary policies of the hawkish U.S. Federal Reserve and the dovish Bank of Japan is underpinning the USD/JPY.

Short-term, the Dollar/Yen is likely to remain under the influence of heightened stock market volatility. Stock market weakness is likely to keep a lid on the USD/JPY. Stock market strength is likely to be supportive.

We should see heightened volatility on Tuesday/Wednesday due to the U.S. Mid-Term Elections. Look for the Dollar/Yen to strengthen if the Republican Party maintains leadership. The USD/JPY should weaken if the power shifts to the Democratic Party.