Japanese general election and non-farm payroll data drive yen news surge; dollar trend remains a mystery

Last week (January 26 to January 30), the global foreign exchange market staged an exciting show. The US dollar index fell by 0.32%, with all major non-dollar currencies rising, including frequent headlines about the Japanese yen. During this period, the euro rose by 0.18%, the yen appreciated by 0.59%, the Australian dollar gained a strong 1.01%, and the British pound increased by 0.37%.

Market-moving policy signals came one after another, from President Trump’s comments on the dollar’s outlook, to the announcement of the new Federal Reserve chair nominee, and the upcoming Japanese House of Representatives election. Each piece of news is rewriting investor expectations for the currency markets.

US and European Policy Uncertainty Causes Euro Fluctuations

EUR/USD fluctuated last week, initially rising to 1.2082 — a new high since June 2021 — before retreating, ending with a 0.18% gain.

Policy speculation was the main driver. Initially, Trump stated he was not worried about dollar depreciation, which sparked widespread speculation about a long-term decline of the dollar, pushing the dollar index to its lowest in nearly four years. However, the story took a sharp turn when Kevin Warsh was appointed as the next Fed chair. Concerns about tightening liquidity grew, as Warsh advocates reducing the balance sheet — leading to a sharp rebound in the dollar and a drop in EUR/USD.

Investors’ focus now shifts to two key triggers. First, the European Central Bank (ECB) interest rate decision on February 5, widely expected to hold rates steady. Second, the US January non-farm payrolls report on February 6, with expectations of about 70,000 new jobs and an unemployment rate of around 4.4%.

Weak non-farm data would amplify expectations of Fed rate cuts, weakening the dollar and supporting a rise in EUR/USD. This week’s attention is on the ECB meeting, US non-farm data, and Iran tensions, with changing rate cut expectations from the ECB and Fed being the decisive factors influencing EUR/USD.

From a technical perspective, although EUR/USD has pulled back from overbought levels, it remains above multiple moving averages, with bullish momentum still strong. If it reclaims the 1.191 level, there’s potential to test the previous high of 1.208. Conversely, if it continues to decline, traders should watch support levels at the 21-day moving average of 1.174 and the 100-day moving average of 1.167.

Japan’s Election Approaching, Yen News a Must-Read for Investors

USD/JPY fluctuated last week, ultimately rising by 0.59%. During this period, concerns about Japanese government intervention and Trump’s comments on a weak dollar pushed USD/JPY near 152. However, with the official announcement of the new Fed chair, USD/JPY regained upward momentum.

A more significant yen-related event is scheduled for February 8 — the Japanese House of Representatives election. This election has become a key variable influencing the yen’s direction.

Mitsubishi UFJ Morgan Stanley Securities analysts note that if the Liberal Democratic Party (LDP) wins decisively, it will further strengthen Prime Minister Suga Yoshihide’s power base, increasing the likelihood of aggressive fiscal policies, including lowering consumption tax.

Invesco strategists warn that if Suga Yoshihide wins, the yen could face further depreciation, as her aggressive fiscal policies are already a major reason for global investors to short the yen.

Aside from the Japanese election, US economic data this week also warrants attention. If the yen depreciates sharply again, Japanese authorities may issue verbal intervention warnings.

From a technical standpoint, USD/JPY has broken above the 100-day moving average. If it continues to rise, key resistance levels are at the 21-day moving average of 156.5 and 158. Conversely, if it falls below the 100-day moving average, support levels are around 152.

Weekly Market Highlights

This week’s key events in the forex market are the Japanese election, US non-farm payrolls, and the ECB meeting. Their developments will directly influence short-term movements of the dollar, yen, and euro. For investors tracking yen news and forex trends, closely monitoring these policy signals is crucial.