Japanese Yen Swings After Rate Hike
The Bank of Japan (BoJ) implemented a widely anticipated 25 basis point increase in interest rates earlier this morning, alongside issuing significantly higher inflation projections. The core CPI estimate for 2025 was revised upwards to 2.4% from the previous 1.9%. Markets have already priced in an additional 32 basis points of easing by the end of the year.
Initially, the yen gained strength but later reversed course following Governor Ueda’s press conference. The USD/JPY’s recovery prior to the press conference suggests that Tokyo traders perceive Ueda as hesitant to raise rates again in the near term. While this does not diminish the yen’s potential for longer-term appreciation, it offers yen bulls a reason to exercise caution this Friday.
The GBP/JPY has declined by 2% since the beginning of the year but has risen by over 1% this week, edging closer to the 192 mark.
Dollar Set for Largest Weekly Decline in Months
The US dollar has faced renewed selling pressure after President Donald Trump called for the Federal Reserve (Fed) to cut interest rates immediately. The US dollar index is on track for its steepest weekly drop in five months, reflecting a continued decline in US Treasury yields.
Speaking at the World Economic Forum in Davos, Trump remarked, “With oil prices going down, I’ll demand that interest rates drop immediately, and likewise they should be dropping all over the world.” Attention now shifts to next week’s Fed monetary policy meeting. Following 100 basis points of rate cuts, the Fed has indicated that further reductions would require evidence of economic slowdown and softer inflation data. While Trump’s low-tax, deregulation policies bode well for economic growth, his immigration restrictions and trade tariffs pose upward risks to inflation, suggesting further rate cuts may be a long way off.
On the data front, initial jobless claims in the US increased by 6,000 to 223,000 for the week ending 18 January, slightly exceeding the forecast of 220,000. Continuing claims, representing individuals still receiving benefits, surged to 1.9 million—the highest level since November 2021—highlighting extended job search durations.
Euro Nearly 2% Stronger This Week
The euro has rallied to nearly $1.05 against the US dollar as of Friday, poised for its largest weekly gain in over a year. This surge has been driven by renewed dollar weakness as investors await greater clarity on President Donald Trump’s policy agenda. Flash PMI data will be closely monitored to assess whether the euro’s recovery can maintain momentum.
In the early days of his presidency, Trump refrained from implementing stringent trade penalties, easing concerns about protectionist policies stifling global growth and driving US inflation higher. His pro-business measures lifted investor sentiment, though tensions remain as he criticised the EU and hinted at potential tariffs. European Central Bank (ECB) President Christine Lagarde urged Europe to prepare for possible trade measures, commending Trump’s decision to delay blanket tariffs as “very prudent.”
On the monetary policy front, the ECB is expected to continue its accommodative stance, with markets anticipating a 25 basis point cut to the deposit rate next week. Meanwhile, consumer confidence in the Euro Area improved slightly to -14.2 in January 2025, in line with market expectations. Consumers remain optimistic about further ECB rate reductions this year.
