Policy Shift and Election Uncertainties: How Will the Dollar-Yen Pattern Evolve

The global foreign exchange market is currently in a stage of complex, intertwined driving factors. The dollar’s movement is influenced by expectations of Federal Reserve policies, causing fluctuations, while the yen faces dual pressures from domestic political changes and international liquidity shifts. The trends of these two key currencies not only impact forex traders’ strategies but also reflect changing global economic outlooks.

U.S. Policy Changes Trigger Dollar Rebound

Recently, the dollar has experienced a clear turnaround. The change in the Trump administration’s choice for Federal Reserve Chair became a key factor in reversing the dollar’s decline. Previously, Trump had stated he was not worried about dollar depreciation, which heightened market concerns about a long-term decline of the dollar. But with Waller appointed as Fed Chair, expectations of tightening liquidity resurfaced, leading to a strong rebound in the dollar.

Waller is known for advocating balance sheet reduction at the Fed, contrasting with previous market expectations of easing policies. This shift in policy outlook directly impacted the currency markets, with EUR/USD sharply retreating from a high of 1.2082 in the short term. Market participants’ reassessment of the Fed’s policy framework became the core driver behind the dollar’s appreciation.

Subsequent U.S. non-farm payroll data further strengthened the dollar’s position. The market expected around 70,000 new jobs and an unemployment rate of about 4.4%. If the actual data met expectations, it would reduce bets on further Fed rate cuts, which would negatively impact EUR/USD.

Japanese Elections Approaching, Yen Faces Policy Uncertainty

In stark contrast to the dollar’s rebound, the yen faces pressure. Political changes in Japan are reshaping market expectations for Japanese monetary policy. With the upcoming general election, Prime Minister Sanae Takaichi’s political prospects have garnered widespread attention.

According to analysis from Mitsubishi UFJ Morgan Stanley Securities, a landslide victory for the Liberal Democratic Party (LDP) would further consolidate Takaichi’s power base. More critically, Takaichi actively promotes fiscal stimulus measures, including tax cuts, which historically have been viewed by global investors as reasons to short the yen. Strategists at Invesco Asset Management note that if Takaichi wins, the likelihood of yen depreciation increases.

Japan’s political trajectory is logically linked to the yen exchange rate. Aggressive fiscal policies imply larger government spending, which can lower real interest rates and ultimately reduce the yen’s attractiveness. Markets also worry that the Japanese government might intervene again to prevent yen appreciation, and such verbal warnings themselves can exert downward pressure on the yen.

Divergence in U.S. and Japanese Monetary Policies Intensifies, Volatility Rises

Behind the dollar’s strength and the yen’s weakness is the divergence in monetary policy expectations between the two countries. The shift in Fed policy outlook combined with Japan’s aggressive fiscal stance is creating an environment of widening U.S.-Japan interest rate differentials. This typically pushes USD/JPY higher, attracting capital flows into dollar assets.

USD/JPY once approached 152, reflecting high market confidence in yen depreciation. Although Trump’s comments on a weaker dollar caused some adjustments, the Fed’s policy shift quickly overturned those expectations. Technically, USD/JPY broke above the 100-day moving average, indicating ongoing upward momentum. If the rally continues, resistance levels are expected around 156.5 and even 158. Conversely, a fall below the 100-day moving average near 152 would serve as a near-term support.

ECB Meeting and Non-Farm Payroll Data: Combined Market Impact

The European Central Bank’s rate decision and the release of U.S. non-farm payroll data have been the two major focal points in the forex market during this period. The market generally expects the ECB to keep policy unchanged, which would further accentuate the policy divergence between Europe and the U.S. If U.S. non-farm data are weak, it would reinforce expectations of Fed rate cuts, weakening the dollar and strengthening the euro. Conversely, strong data would support the dollar further.

Technically, EUR/USD shows a correction from overbought levels but remains above multiple moving averages, indicating that bullish momentum persists. If the pair recovers above 1.191, it could test previous highs around 1.208. If it continues to decline, support levels are at the 21-day moving average of 1.174 and the 100-day moving average of 1.167.

Overall Outlook: Dollar Strength Likely to Persist, Yen Under Pressure

From a broad perspective, the divergence in policy expectations between the U.S. and Japan is shaping the current core landscape of the forex market. The tightening outlook for the Fed supports dollar strength, while Japan’s aggressive fiscal policies and intervention fears weigh on the yen. Although the euro has some support, the overall dollar dominance remains intact.

Looking ahead, market trends will continue to be driven by changes in U.S. and Japanese monetary policy expectations. Investors should closely monitor new policy developments and observe whether technical support and resistance levels hold. The standoff between the dollar and yen will likely continue to unfold against the backdrop of global liquidity conditions.