Non-farm data and Japan's general election influence USD/JPY market

Last week, the foreign exchange market showed signs of divergence, with the US dollar index falling 0.32%, while most non-dollar currencies, including the Japanese yen, generally appreciated. Behind this trend, market re-pricing of Federal Reserve policies and the deep impact of geopolitical events on exchange rates were reflected. Over the next two weeks, non-farm payrolls and the Japanese House of Representatives election will be key factors influencing the movements of the dollar and yen.

Last Week: Dollar Under Pressure, Yen Stabilizing Short Term

The dollar’s oscillating decline last week was mainly driven by former President Trump’s comments about a weaker dollar. The president stated he was not worried about the dollar weakening, which immediately sparked market speculation about a prolonged depreciation cycle, pushing the dollar index to a near 4-year low. However, the market did not remain bearish on the dollar, as the announcement of the new Federal Reserve chairperson reversed sentiment.

The announcement of the new Fed chair candidate marked a turning point. Market expectations that the next Fed leadership would favor balance sheet reduction raised concerns about tightening liquidity. This risk prompted funds to flow into the dollar as a safe haven, leading to a rebound within the week.

The yen showed a pattern of initial weakness followed by recovery. Markets once worried that Japanese authorities might intervene in the forex market to stabilize the yen, with USD/JPY approaching the 152 level under this expectation. But as signals from the Fed’s policy stance shifted, the dollar strengthened, and the yen adjusted accordingly. Nonetheless, compared to other non-dollar currencies, the yen’s decline was smaller, indicating continued safe-haven demand.

Euro Rises but Faces Resistance; Key to Non-Farm Data Reversal

EUR/USD experienced a typical “rise and pullback” pattern last week. The euro briefly climbed to 1.2082, the highest since June 2021, but ultimately closed with a modest gain of only 0.18%, indicating profit-taking pressure at higher levels.

Focus will now turn to two upcoming events: the European Central Bank’s interest rate decision on February 5 and the US January non-farm payrolls report on February 6. The market generally expects the ECB to hold rates steady, but the US data could be more decisive. If job growth falls short of about 70,000 new jobs and the unemployment rate remains around 4.4%, it could reinforce expectations of Fed rate cuts, which would likely weaken the dollar and support a rebound in the euro.

From a technical perspective, although EUR/USD has pulled back from overbought levels, prices remain above multiple moving averages, indicating ongoing bullish momentum. If the euro reclaims 1.191, it could test the previous high of 1.208. Conversely, if the decline continues, key support levels are at the 21-day moving average of 1.174 and the 100-day moving average of 1.167.

Japan Election Approaching, Yen Facing Depreciation Pressure

The Japanese House of Representatives election is scheduled for February 8, and its impact on the yen should not be underestimated. A decisive victory for the ruling Liberal Democratic Party (LDP) would further solidify Prime Minister Sanae Sato’s power base, making it easier to implement expansionary fiscal policies.

Sato’s government advocates for fiscal stimulus measures, including major reforms like lowering consumption tax. From a market perspective, such expansionary fiscal policies often carry the risk of currency depreciation. Analyses from institutions like Mitsubishi UFJ Morgan Stanley Securities and Invesco suggest that if Sato wins and secures a second term, her aggressive fiscal stance could trigger yen depreciation again, which is one of the key reasons global investors are shorting the yen.

If the yen depreciates sharply again, Japanese authorities may face pressure to intervene verbally in the forex market. This expectation alone can act as a restraint on the yen, and markets will be closely watching for such developments.

Technical Outlook: Key Levels for USD and JPY

USD/JPY has already broken above the 100-day moving average, indicating upward momentum. If the rally continues, resistance levels to watch include around 156.5 near the 21-day moving average and the 158 level. Conversely, if the 100-day moving average support is lost, recent lows around 152 will serve as support.

Overall, this week’s forex market volatility will hinge on two major events: US non-farm payrolls, which will shape expectations for Fed policy, and the Japanese election, which will influence yen supply-side outlooks. The movements of the dollar and yen will ultimately depend on how these events unfold relative to market expectations. Investors should prepare for risk management ahead of these key releases.