Last year's turmoil in the foreign exchange market: the political and economic battles over the USD/JPY exchange rate

Last year’s Q1 foreign exchange market experienced a complex wave of political and economic data interactions. Among them, the US dollar performed strongly, while the Japanese yen faced multiple shocks, with the interaction between the two currencies fully reflecting market expectations for global economic policies. Throughout early February, the US dollar index rose by 0.55%, while the yen declined by 1.57%, forming a stark contrast.

Japan’s General Election Reshapes Yen Outlook

The results of Japan’s House of Representatives election were announced on February 9, with the ruling coalition of the Liberal Democratic Party and Nippon Ishin winning 352 seats out of 465, gaining an absolute majority. This election has had a profound impact on the yen exchange rate.

The new government, led by Prime Minister Sanae Takaichi, advocates for expansionary fiscal policies. Such policies typically weaken currency appreciation expectations, as excessive fiscal spending can easily push up inflation. Market analysis suggests that future policy implementation will become smoother due to the coalition’s absolute majority.

However, the fundamental force to reverse the yen’s ongoing depreciation is not administrative orders but monetary policy. Japan’s former Deputy Finance Minister openly stated that using foreign exchange reserves for market intervention can only bring short-term fluctuations. Without the Bank of Japan’s firm commitment to raising interest rates, the depreciation trend will be difficult to reverse. Overnight index swap data shows that the market expects about a 75% probability that the Bank of Japan will raise interest rates by 25 basis points at the April meeting, which will be key to stabilizing the yen.

The Economic Data Supporting the Strength of the US Dollar

The US dollar’s resilience is primarily driven by better-than-expected US economic data. Meanwhile, Federal Reserve policy expectations are also shaping the dollar’s outlook.

During this period, the EUR/USD declined by 0.30%, mainly due to positive US economic data supporting the dollar. The European Central Bank maintained interest rates as expected, with the market generally believing that the ECB has completed its rate-cut cycle and lacks new stimulus factors. In contrast, upcoming US non-farm payrolls and inflation indices have become market focal points.

Market expectations are for about 70,000 new non-farm jobs added this month, with the unemployment rate remaining at 4.4%. Notably, the report also includes adjustments to 2025 annual data, with some investment banks predicting a significant downward revision of 1 million jobs for the year. If non-farm payrolls fall short of expectations, it will reinforce market bets for further Fed rate cuts, thereby weakening the dollar. According to CME FedWatch Tool, at that time, the market priced in a 69.1% chance of the Fed cutting rates in June.

Technical Analysis of Exchange Rate Trends

From a technical perspective, EUR/USD remains above the 21-day moving average, indicating relatively strong bullish momentum. The next target for this pair is around 1.192. If it rises sharply and then pulls back, the first support level is near the 21-day moving average at 1.177. If it declines further, the 100-day moving average at 1.167 will serve as the second line of defense.

USD/JPY is also at a critical technical point. The pair is oscillating around the 21-day moving average; if it falls below this average, the risk of further decline increases, with support near the 100-day moving average at 154.3. Conversely, if it successfully holds above this average, upward potential opens, with resistance at the previous high of 159.5. Geopolitical developments, US economic data releases, and Japanese authorities’ statements on the currency market will all be important variables influencing the future movements of the US dollar and yen.