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  • USD/JPY is consolidating just above lows of the day shortly after the Tuesday FX close.
  • USD dynamics are likely to dominate the price action for the remainder of the week given key US risk events.
  • JPY traders will keep one eye on Japanese Service PMI numbers during Wednesday’s Asia session, however.

USD/JPY is consolidating in the 102.70s, just above 10-month lows set earlier in the day at 102.60. The pair closed Tuesday FX trade with losses of around 0.4% or just under 40 pips, after succumbing to broad USD weakness and bets of higher inflation (in the US) ahead.

Looking ahead, Japanese Markit Services PMI numbers will be released at 00:30GMT on Wednesday; the headline index is seen dropping to 47.2 from 47.8, a reflection of growing concerns in the economy regarding the increased rate at which the virus has been spreading. Indeed, Japanese PM Yoshida Suga is expected to announce a new state of emergency for the country before Thursday.

The USD side of the equation is likely to dominate proceedings for the rest of the week, however, with some key US related risk events incoming.

Incoming US risk events

A number of US news organisations have said that they expect to be able to call both of Tuesday’s Senate elections by Wednesday morning (US time). There is a risk the outcome will be closer than expected and remain unknown for a few days, which might well benefit havens such as JPY at the expense of USD.

The outcome that would trigger the most volatility would be an unexpected Democrat victory in both elections; nominal US bond yields would undoubtedly move much higher in anticipation of further debt-funded US fiscal stimulus, with many pointing to the 1.0% level as a key area of resistance for the US 10-year bond yield. A break above this could trigger a broader sell-off in US government debt markets as trend-following algorithms join the selling, traders have speculated.

How this would impact FX markets is unclear; real US yields might actually move lower if expectations for further stimulus give a further boost to inflation expectations. This might end up being a USD negative, though if the market reacts to a surprise Democrat victory in a risk on fashion, then safe-haven currencies like JPY are less well placed to gain versus the US dollar compared to the likes of AUD or NZD.

Aside from the Senate elections, eyes will also be on Congress, who are slated to certify the result of the November 2020 Presidential election by Thursday. The result is expected to be certified, though a large number of Senate and House Republicans will contest the election which might result in a few hiccups along the way.

Meanwhile, FX markets will also need to keep an eye on the next batch of ISM PMI numbers, this time for the service sector (released on Thursday). Official jobs data will be released on Friday. Both will give a timely update as to the state of the US economy in December. Tuesday’s ISM manufacturing numbers were strong across the board, but the sector is more immune to Covid-19 lockdown restrictions and is likely riding the wave of a better recovery elsewhere in the global economy (such as in Asia).

USD/JPY technical levels