The USD/JPY commenced the new week with a positive momentum following last week’s solid gains, but subsequently retreated from its peak levels as the greenback experienced a decline against other currencies, particularly those sensitive to risk, like the Aussie dollar. This week is set to be significant for financial markets, featuring crucial central bank rate decisions, US-China trade discussions, and upcoming earnings reports from technology companies. Currently, the USD/JPY forecast remains optimistic despite the greenback’s challenges against other currencies, primarily due to the anticipation that the new Japanese government will implement an expansionary fiscal policy. However, will the Bank of Japan attempt to address that with a more accelerated policy normalization? Insights on that are what investors will seek to uncover from the BoJ’s policy meeting this week. Meanwhile, the US Federal Reserve is anticipated to implement rate cuts; however, if their stance is perceived as more dovish than anticipated, this could serve as a bearish catalyst for the dollar.
Risk assets began the week with a favorable outlook overnight, supported by weekend discussions indicating that Washington and Beijing might be approaching a consensus. Recent reports indicate advancements in multiple areas — notably the potential sale of TikTok, heightened soybean acquisitions, and modifications to tariffs. Attention is now focused on the upcoming meeting on Thursday between US President Donald Trump and Chinese President Xi Jinping, where there is potential for these preliminary agreements to be solidified. Markets would undoubtedly appreciate any postponement of the significant tariff measures initially proposed in April. The most notable variable is China’s position regarding export controls on rare earth elements. A delay of even a year would be positively received by investors, considering the global reliance on these materials for advanced manufacturing.
If the Trump–Xi summit meets these optimistic expectations, the dollar could experience slight downward pressure. This week is notably busy for central banks, as policy meetings are scheduled in the US, eurozone, Japan, and Canada. The Federal Reserve is anticipated to reduce rates by an additional 25 basis points. This time, however, the positioning in the dollar appears more balanced compared to September, suggesting that any response to dovish remarks from Chair Jerome Powell may be limited. The recent September CPI data, which showed a softer outcome, diminishes the chances of any unexpected hawkish moves. Meanwhile, the current US government shutdown adds complexity to the situation. In light of the limited availability of official data releases, attention is now directed towards the political dynamics unfolding in Washington. The current betting markets estimate the likelihood of the shutdown extending past 16 November to be approximately 49%. A pressing issue arises on 15 November, as Scott Bessent indicates that the US military may face unpaid wages if the impasse continues. The absence of official data suggests that the release of third-quarter GDP could be postponed — unfortunate, as the consensus had anticipated a commendable 3.0% annualized increase.
The yen continues to experience mild pressure, as the anticipated policy direction from Prime Minister Sanae Takaichi is perceived as unfavorable for the currency. The Bank of Japan is facing increasing political pressure to maintain low interest rates, with market expectations reflecting only a 10% probability of a rate increase during Thursday’s BoJ meeting. Despite the divisions within the board, the prevailing sentiment leans towards patience rather than urgency, particularly following the historic election of fiscal dove Takaichi as Japan’s first female Prime Minister. Inflation stands at a notable 2.9%, exceeding the target, as the broader economy demonstrates unexpected resilience in the face of US tariffs. This context is expected to facilitate the Bank of Japan’s gradual transition towards policy normalization. Nevertheless, decision-makers continue to exercise caution regarding premature tightening, as it could extinguish the current momentum. A December rate hike appears more likely, especially if inflation remains steady. The USD/JPY is likely to remain above 150.00 unless the BoJ implements an unexpected rate hike or adopts a notably hawkish stance on future policy this week.