The analysis presents 3 short-term scenarios for the dollar/yen exchange rate and the S&P 500 depending on the outcome of the U.S. midterm elections, identifying fiscal policy and long-term interest rate trends as the market's focus.
In this midterm election, 435 House seats and 35 Senate seats are being contested, and the outcome is expected to affect the dollar/yen exchange rate through expectations for fiscal expansion. If additional tax cuts and large-scale spending are approved, long-term interest rates could come under upward pressure, widening the Japan-U.S. interest rate differential and creating pressure for a weaker yen and stronger dollar. Conversely, if expectations for fiscal expansion recede, interest rates could decline, potentially contributing to a stronger yen and weaker dollar. The terms of the members facing reelection run through 3 January 2027, so policy will not move immediately after a change of administration.
Short-term market movements are organized into 3 scenarios based on the election outcome. Under Scenario 1, if Republicans retain majorities in both chambers, factors supporting higher long-term interest rates and a weaker yen and stronger dollar are expected to intensify. Under Scenario 2, if Democrats hold a majority in the House while Republicans hold a majority in the Senate, creating divided government, long-term interest rates could come under downward pressure, potentially supporting a stronger yen and weaker dollar. Under Scenario 3, if Democrats win majorities in both chambers, expectations for fiscal expansion would recede and interest rates would decline, while views on the Federal Reserve's independence could also become unsettled, allowing for both stronger- and weaker-yen phases.
Technical analysis of dollar/yen indicates that the weekly chart continues to show signs of a decline while suggesting the possibility of a rebound, and that the daily chart is expected to remain in a rebound trend with the low 158s acting as resistance. The S&P 500 is maintaining an upward structure on the weekly chart, while short-term direction on the daily chart remains uncertain and trading is expected to continue near highs. Depending on the election outcome, the market could test levels in the low 7,600s and low 7,800s, with direction likely to be determined by the market's reaction to upcoming data releases.