The USD/JPY exchange rate rose to a multi-week high of 154.68 this week as investors moved to the US dollar following Donald Trump’s election. It then pulled back slightly to 152.63 after the Federal Reserve delivered its interest rate cut.
Donald Trump election
The main catalyst for the USD/JPY exchange rate was Donald Trump’s election, which analysts believe will be highly consequential for the US and other countries.
Trump won by a landslide, winning 301 electoral college votes compared to Harris’ 226. Most importantly, he also won the popular vote by over 74 million compared to Harris’ 70.3 million.
His election will have a major impact on the US economy, especially if he wins the House of Representatives. He has pledged to deliver massive tax cuts, mostly to companies, and end most of the regulations.
Trump has also pledged to levy tariffs on most imports, especially those from China. As a result, there is a likelihood that these tariffs will lead to more inflation and push the Fed to embrace a fairly hawkish tone.
Federal Reserve cut
The other important catalyst for the USD/JPY pair was the Federal Reserve interest decision. In it, the bank decided to cut interest rates by 0.25%, the second consecutive cut. Before that, the bank slashed rates by 0.50%.
Jerome Powell maintained that the Fed would continue watching the incoming data to determine whether to cut or hold rates steady. The next data to watch out for will be the upcoming US inflation numbers scheduled for Wednesday next week.
Analysts believe that the headline Consumer Price Index (CPI) dropped from 2.4% in September to 2.2% in October as it neared the Fed’s target of 2.0%. Core inflation, which excludes the volatile food and energy prices, is expected to come in at 3.0%, down from almost 5% earlier this year.
There will be no major economic data from Japan. The key one to watch will be minutes of last meeting in which the bank maintained interest rates steady. Analysts expect that the BoJ will hold interest rates steady in the coming meetings.
The USD/JPY pair reacts to actions by the Fed and the BoJ because of the carry trade opportunity. A carry trade is when investors borrow from a low-interest rate country and invest in a high rate country. With the Fed cutting, the spread between the two countries has narrowed, invalidating the carry trade.
USD/JPY nears a golden cross
The daily chart shows that the USD/JPY exchange rate has been in a strong bull run in the past few months, rising from 140 to 154. Most notably, the pair is about to form a golden cross pattern as the 50-day and 200-day Exponential Moving Averages (EMA) near their crossover. In most cases, this is one of the most bullish signs in the market.
Oscillators like the Relative Strength Index (RSI) and the MACD have all pointed upwards. Therefore, there are rising odds that the pair will have a bullish breakout as bulls target the year-to-date high of $161.96, which is about 6% above the current level.
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