US
The DXY index has retraced almost 50% of its January 19-27 decline and consolidating recent gains. A heavy slate of US jobs data will steer USD this week, capped by Friday’s non-farm payrolls. Evidence that downside risks to employment have diminished can support a firmer USD within the range that’s been in place since June 2025. By contrast, further signs that labor demand is weakening will weigh on USD.
The US government entered a partial shutdown over weekend after Congress failed to approve the 2026 spending bill. However, disruption is expected to be limited as the spending lapse is poised to be resolved in a matter of days.
The January ISM manufacturing index is expected to show a slower contraction in manufacturing sector activity (3:00pm London, 10:00am New York). The headline index is projected at 48.5 vs. 47.9 in December. Importantly, continued easing in the Prices Paid sub-index and improvement in the Employment sub-index would validate Fed Chair Jay Powell’s comment that tension between employment and inflation has diminished, leaving Fed policy in a good place.
JAPAN
USD/JPY has retraced about 50% of last week’s plunge and is trading just under 155.00. The Bank of Japan (BOJ) January 22-23 policy meeting Summary of Opinions reinforces the bank’s cautious hiking bias. At that meeting, the BOJ kept the policy rate at 0.75% (widely expected) in an 8-1 majority vote. Staunch hawk Takata Hajime favored a 25bps hike to 1.00%.
According to the Summary of Opinions one board member stressed that the only prescription to curtail the depreciation of the yen and the rise in long-term interest rates is “to raise the policy interest rate in a timely and appropriate manner.” Another member, noted “it is appropriate for the Bank to raise the policy interest rate at intervals of a few months.”
Interestingly, a member pointed out that “for firms as a whole, the increased interest burden has been absorbed by the current solid business conditions to a large extent.” This suggests there is plenty of room for the BOJ to normalize rates closer to the mid-point of its neutral policy range estimate (between 1% and 2.5%).
The swaps market price-in 20% odds of a March rate hike, and about 70% odds of an April rate increase. Our base case is for the BOJ to deliver another hike at the April 28 meeting - after the Shunto spring wage negotiations, which typically wrap up by mid-March. We see room for USD/JPY to edge down to 140.00 by year-end.
An Asahi newspaper poll (conducted on Saturday and Sunday) indicated that Takaichi’s coalition was projected to win 300 or more of the 465 seats in the lower house. 233 seats are enough to secure a simple majority, 244 seats are required for a stable majority, 261 for an absolute stable majority, and 310 for a supermajority. A supermajority would give the ruling bloc the power to fast-track legislation and override the currently fragmented upper house.
