Capitol Hill Votes and Fed Outlook

While Japanese data drew market attention early in the Wednesday session, Capitol Hill will take center stage later. The Senate approved a funding package to reopen the government on Tuesday, November 11, passing the bill to the House.

Markets expected a House vote to approve the Senate’s measure, potentially reopening the government this week. However, USD/JPY is exposed to the risk of the House failing to approve the bill, given that it differs from the bill the House had originally passed to the Senate.

Further delays to the US government returning to office could trigger a US dollar sell-off, sending USD/JPY toward 153. On the other hand, the pair could rise toward 155 if the House approves the bill. However, a move toward 155 may draw the Japanese government’s attention and potentially trigger more yen intervention threats, suggesting a choppy session.

While Capitol Hill will take center stage, traders should monitor FOMC members’ speeches. Views on inflation, labor market conditions, and potential economic fallout from the shutdown will influence bets on a December Fed rate cut.

According to the CME FedWatch Tool, the chances of a Fed rate cut in December were finely balanced, rising from 62.4% on November 10 to 67.9% on November 11.

Despite near-term strength, the broader outlook remains bearish as narrowing rate differentials may favor the yen. The Fed remains on a dovish rate path, while the BoJ continues to keep a rate hike on the table, supporting a narrowing in rate differentials in favor of the yen.

USD/JPY Scenarios: Diverging Monetary Policies

• Bearish USD/JPY Scenario: Hawkish BoJ chatter, intervention warnings, failure by the House to approve the funding bill, and dovish Fed rhetoric could drag USD/JPY toward 153.
• Bullish USD/JPY Scenario: Dovish BoJ signals, House passes funding bill, and hawkish Fed rhetoric could send USD/JPY toward 155.