Yen Weakens Despite Risk-Off Sentiment, Jobs and Inflation Data to Drive Markets Ahead

The Japanese yen is experiencing a decline today, even as a risk-averse atmosphere persists across Asian markets. This is reflected in a further drop in the Nikkei index, which had recently crossed the psychological barrier of 40,000, indicating that the previous rally was not sustainable for investors.

Adding to the yen's challenges, the December PMI Services data revealed only slight growth, indicating that there has not been a significant boost to the larger economy. Bank of Japan (BoJ) Governor Kazuo Ueda has also expressed a cautious outlook regarding monetary policy changes, providing no clear signals about a potential interest rate increase in the near future. Analysts are beginning to view last week’s yen recovery as possibly short-lived.

In other markets, commodity currencies are showing stronger performance today, building on last week’s resilience. Despite this, their gains appear somewhat subdued, reflecting an underlying caution among traders. The euro and the pound are trading mixed, stabilizing after significant losses suffered last week. Meanwhile, the dollar, yen, and Swiss franc are struggling, with the yen being the weakest of the group.

As anticipation mounts for a critical week ahead, markets are preparing for the release of important economic data. The U.S. Non-Farm payrolls and ISM Services data are expected to be significant factors influencing the dollar's movement, especially as the market is firmly braced for the Federal Reserve to pause its easing cycle this month. Inflation reports from the Eurozone, Switzerland, and Australia will also be in the spotlight, shaping the outlook for the monetary policies of the European Central Bank (ECB), Swiss National Bank (SNB), and Reserve Bank of Australia (RBA). Furthermore, Canadian employment data is set to test the Canadian dollar, which performed well last month but has recently shown signs of weaker momentum.

From a technical perspective, the break of the AUD/CAD medium-term rising channel indicates that the recent corrective rally from 0.8562 may have concluded at 0.9375. A firm breach of the 0.8851 support level would strengthen this bearish outlook. Conversely, a robust rebound from current levels, coupled with a sustained break above the 55-day EMA at 0.9060, would maintain the upward trend. The upcoming CPI reports from Australia and Canadian employment data will likely play a crucial role in determining the pair’s next significant movement.

BoJ Ueda's Cautious Policy Stance

During an event hosted by the Japanese Bankers Association, BoJ Governor Ueda reiterated the need for a careful approach concerning monetary policy adjustments. He pointed out that any potential interest rate hikes would depend heavily on ongoing improvements in economic and price conditions.

"Our stance is that we will raise the policy interest rate to adjust the degree of monetary easing if economic and price conditions keep improving," Ueda explained. However, he also highlighted the importance of remaining vigilant concerning various risks, suggesting that the timing for such adjustments will be thoughtfully evaluated. Ueda expressed hope for a balanced rise in wages and prices over the next year.

Japan's PMI Services Data Indicates Small Gains

The services sector in Japan made a slight uptick in December, with the final PMI Services index rising to 50.9 from the previous 50.5 in November, suggesting marginal growth. Additionally, the PMI Composite index increased to 50.5 from 50.1, demonstrating modest stabilization in the overall economy.

According to Usamah Bhatti, an economist at S&P Global Market Intelligence, "December data revealed sustained rises in both business activity and new business," with new orders experiencing their most substantial growth in four months. Employment in the service sector has risen continuously for the fifteenth month, indicating steady gains in the labor market. Nevertheless, confidence in future business expansion seems to have eased slightly.

The broader economic expansion continues to be supported by a reduced contraction in manufacturing output alongside growth in the services sector. The rate of new orders growth across sectors reached its highest since August, primarily due to progress in completing backlogs within manufacturing. Still, optimism regarding future production has declined, falling below the average expected for 2024.

China's Services Sector Shows Signs of Growth

China’s services sector experienced improved performance in December, with the Caixin PMI Services index increasing to 52.2 from 51.5 in November, marking the highest level since May. However, the overall economic backdrop remains mixed, as the Composite PMI fell to 51.4, the lowest since September. This inconsistency reveals that robust services growth is not sufficient to counteract the slowdown in manufacturing output.

Wang Zhe, a senior economist at Caixin Insight Group, noted, “Significant downward pressures persist, with weak domestic demand and increasing unfavorable external factors.” He further emphasized that sluggish employment rates and tightening profit margins are diminishing market optimism. Drop-offs in various indices from the manufacturing PMI survey suggest that more time is necessary for assessing the consistency and effectiveness of recent policy stimulus.

Critical Jobs and Inflation Data Ahead

As global markets enter the first full trading week of 2025, an array of impactful economic events is scheduled. Notably, U.S. data, particularly Non-Farm Payrolls and ISM Services indices, will play a central role. Expectations are leaning towards the likelihood that the Fed will put a pause on its easing cycle this month, with data releases unlikely to disrupt that sentiment unless significantly negative results emerge. The Fed minutes from December, also anticipated this week, may provide additional insight into policymakers' risk evaluations and rationale for the expected policy direction.

Inflation will have a prominent presence in the coming week, with CPI data releases from the Eurozone, Switzerland, and Australia also drawing attention. Eurozone inflation is expected to see a modest increase as energy base effects reduce, yet this is not projected to impede the ECB's cautious easing pace. The ECB is still predicted to enact further rate cuts in January. In Switzerland, inflation is likely to stabilize at sub-1% levels, consolidating the SNB's chances for further rate reductions later this year.

Australia's inflation outlook appears less straightforward. While the prevalent view is for the RBA to begin cutting rates in May, consistent monthly CPI readings around 2% may strengthen the case for an earlier cut in February. However, the broader inflation perspective is contingent on the forthcoming quarterly inflation report later this month.

Additionally, Japan's reports on cash earnings and household spending are set to provide insights into the domestic economic picture, but global uncertainties—especially those surrounding the U.S. economic climate—might cause the BoJ to retain a cautious wait-and-see approach, even in light of robust domestic data.

Canada's employment figures will be vital indicators for the BoC's monetary policy outlook. The BoC has hinted at a slower pace of easing this year, but the resilience—or lack thereof—of the labor market will heavily impact the direction of its ongoing rate-cutting strategy.

Key events for the coming week include:

• Monday: China Caixin PMI services; Swiss retail sales; Eurozone PMI services final, Sentix investor confidence; UK PMI services final; US PMI services final, factory orders.
• Tuesday: Japan monetary base; Australia building permits; Swiss CPI, foreign currency reserves; UK PMI construction; Eurozone CPI flash, unemployment rate; Canada trade balance, Ivey PMI; US trade balance, ISM services.
• Wednesday: Australia monthly CPI; Japan consumer confidence; Germany factory orders, retail sales; Eurozone PPI; US ADP employment, jobless claims, FOMC minutes.
• Thursday: Japan average cash earnings; Australia retail sales, goods trade balance; China CPI, PPI; Germany industrial production, trade balance; Eurozone retail sales.
• Friday: Japan household spending; Swiss unemployment rate; France consumer spending, industrial production; Canada employment; US non-farm payrolls, U of Michigan consumer sentiment.

GBP/JPY Daily Outlook

GBP/JPY has shown a notable recovery today but remains within the range below 198.94. The intraday bias is neutral. The overall outlook continues to suggest that the corrective pattern from 180.00 is still in progress. Additional upward movement is favored as long as the support at 194.04 holds. A push above 199.79 will target the channel resistance projected at approximately 203.90. However, a strong break below 194.04 would shift the bias towards a downside movement towards the support at 188.07.

In the broader context, price movements from 208.09 are considered a corrective wave to the entire rally originating from the low of 123.94 reached in 2020. The consolidation range is set between the 38.2% retracement of 123.94 to 208.09 at 175.94 and the peak at 208.09. Nonetheless, a decisive break below 175.94 would suggest that a deeper correction is likely underway.

Yen, Economy, Markets