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With headline risk elevated and key Fed and BoJ events ahead, USD/JPY direction remains fluid, although the bias continues to lean bullish.
- Yen supported by safe haven flows
- USD/JPY holding above key technical levels
- Political risks adding volatility
- U.S. shutdown delays key data
- BoJ and Fed speakers may drive moves
USD/JPY Outlook Summary
USD/JPY directional bias continue to tilt higher despite a messy backdrop of trade tensions, political instability and a U.S. government shutdown. While headline risk remains elevated, the pair has held key technical levels and continues to attract dip buyers. With safe haven flows supporting the yen and political uncertainty clouding the BoJ outlook, direction remains fluid, but the broader setup still favours upside—at least for now.
Tariff Headlines Spark Volatility
Trade tensions between the U.S. and China have flared again on Friday after Donald Trump announced 100% tariffs on Chinese exports, though the measures aren’t due to take effect until November 1. Beijing has labelled the move hypocritical but stopped short of retaliating, defending its export curbs on rare earths as driven by security concerns rather than politics. The restraint suggests it’s leaving the door open for talks.
The timing of Trump’s announcement—after the physical close of U.S. equity markets on Friday and heading into a long weekend for many parts of the country—was familiar. He’s used similar tactics before, dropping major trade headlines late in the day only for them to be softened or reversed shortly after. The forward start date for the tariffs is another tell, giving both sides time to negotiate before the measures kick in.
It helps explain why markets have shown some confidence in the so-called “TACO” trade: Trump always chickens out. While headline risk remains high, investors are wary of overreacting given his track record of backpedalling once markets wobble.
While faith in the “TACO” trade may pressure the yen, that could be offset by fresh political uncertainty in Japan, leaving near-term direction finely balanced.
Japanese Political Uncertainty Dims Upside Risks
Political uncertainty in Japan would normally weigh on the yen, but this time it may have the opposite effect. The collapse of the long-running coalition between the ruling LDP and Komeito has cast doubt on Sanae Takaichi’s chances of becoming Japan’s first female prime minister, raising the risk of a shaky or short-lived government.
The yen strengthened after the news, clawing back losses made earlier in the week when Takaichi’s selection as LDP leader pushed it lower on expectations of bigger government spending and continued loose policy. Now, with Japan’s political outlook more uncertain and global risks on the rise, investors may view the yen as a safer bet, even before considering how the Bank of Japan might respond.
Fed, Markets Still Flying Blind due to Shutdown
The U.S. government remains shut down, and layoffs have now begun across multiple federal agencies. Donald Trump has blamed Democrats for the shutdown and the resulting job losses. Democrats remain firm, insisting on protections for health-insurance subsidies under the Affordable Care Act. With both sides showing little sign of compromise, a near-term resolution to end the shutdown looks unlikely.
That means scheduled economic data releases may be delayed (as indicated with the yellow shading in the calendar below), keeping Fed policymakers and markets largely in the dark on the real-time impact of the shutdown on the economy. That brings into question what more Fed officials can add, although there’ll still be interest in what Powell, Waller and Miran have to say given the former remains Fed chair, with the remaining two leading candidates to replace him when his term expires in May 2026. The appearances are marked red given their ability to generate volatility in USD/JPY.
Source: TradingView
On the Japanese side of the ledger, the data calendar is quiet, putting greater emphasis on an auction of 20-year Japanese government debt and speeches from BoJ officials to deliver bouts of volatility. Will there be demand for long-dated JGBs given greater political uncertainty, particularly towards the fiscal outlook? And will the BoJ provide a more dovish outlook given the change in LDP leadership? On the balance of probabilities, the risks from those events skew towards a backdrop of yen weakness, especially with trade uncertainty feeding into dovish expectations from central banks globally.
Market Drivers Shift
Source: TradingView
Looking briefly at what factors may have been influencing USD/JPY movements over the past fortnight, the rolling 10-day correlation coefficients above suggest a shift has taken place. As opposed to the U.S. rate outlook that’s long been a historic driver of dollar-yen, the pair has been far more interested in the shifting rate outlook in Japan from the change in political leadership, with the relationship with Japanese two-year yields (blue) far more meaningful than anything across the U.S. curve or yield differentials. As Japanese yields have fallen, USD/JPY has tended to push higher.
USD/JPY: Buying Dips Preferred
You can see that price action in the daily chart below, with Monday’s surge on Takaichi taking the LDP leadership followed by continued gains over the preceding days prior to Friday’s tariff-induced reversal.
Source: TradingView
While it comes with the disclaimer that markets are likely to remain headline-driven until the tariff uncertainty is resolved, the broader price and momentum picture is one that continues favouring buying dips over selling rips.
USD/JPY managed to hold the break above former range resistance at 151.00 despite Friday’s reversal, bouncing strongly on Monday in holiday-impacted trade. The price also remains above the 50 and 200-day moving averages, with the former trending higher. Both RSI (14) and MACD are generating bullish signals, pushing higher without being overbought.
Levels to watch near term include 153.28 and 154.80 on the topside, along with 151.00, 149.00 and the 50/200-day moving average intersection just above 148 on the downside. Recent price action either side of 152 indicates it’s also being used as a level for trade entry and exit.