Ahead of the September FOMC meeting, this article reviews the outlook for USD/JPY based on the unemployment rate and movements in interest rate markets. The extent of any rate hike and the stock market’s reaction could affect the exchange rate.
The US unemployment rate remained low at 4.1% in August, suggesting that applying the adjusted unemployment rate would increase the likelihood of a federal funds rate hike. The chart shows the relationship between the federal funds rate and the unemployment rate.
The focus regarding the size of the rate hike at the September FOMC is shifting toward whether there will be a large hike of 0.5% or more. The rise in the 2-year Treasury yield indicates that it is as much as 1% above the upper bound of the federal funds target, while expectations of a small 0.25% rate hike are spreading.
Some view the previous FOMC’s decision to hold off on a rate hike as having supported the recovery in stock prices. It has also been pointed out that this time, the stock market could be affected not only by whether there is a rate hike, but also by a large hike of 0.5% or more.
As political factors, President Trump’s policy stance and the approaching US midterm elections could affect monetary policy decisions. One view is that the foreign exchange market could be affected through movements in stock prices.