Against the backdrop of today’s US midterm elections and the risk of renewed tensions in the Middle East, USD/JPY is expected to trade within a limited range, with volatility potentially rising from the early morning hours onward.
As results from today’s US midterm elections are expected to emerge progressively, USD/JPY is likely to remain in wait-and-see mode in the Tokyo and European sessions, with trading also expected to remain subdued during New York hours. Volatility could rise depending on the progress of the vote count.
A Democratic sweep of both houses, or a divided Congress, would raise concerns about downside risks in US equities, potentially bringing risk-off moves and changes in US yields to bear on USD/JPY. However, USD/JPY has recently shown a tendency to respond less strongly to election events.
Views are spreading that a sharp emergence of geopolitical risks surrounding the Middle East could support USD/JPY downside. Reports suggest that Israel is requesting and coordinating with the United States for another attack on Iran after assessing the outcome of the midterm elections. The prevailing view is that US policy toward Israel is likely to remain broadly unchanged.
After the vote count, attention is likely to shift to tensions in the Middle East and movements in crude oil and interest rates. In the short term, USD/JPY is expected to consolidate its downside while looking for opportunities to test higher levels as US yields rise.