USD/JPY firms near one-year highs as markets scale back near-term Fed cuts
- USD/JPY hovers near one-year highs as resilient US data reinforce a cautious Fed outlook.
- Mixed US data keep near-term Fed rate-cut expectations in check.
- Traders look to Fed commentary for fresh monetary policy clues.
The Japanese Yen (JPY) extends its losses against the US Dollar (USD) on Friday, with USD/JPY pushing higher for a fourth straight day as the Greenback builds on its recent advance following the latest batch of US economic releases. At the time of writing, the pair is trading around 158.00, hovering near its highest level since January 2025 and on track for a second straight weekly gain.
Data from the US Bureau of Labor Statistics (BLS) showed that job growth slowed in December. The US economy added 50,000 jobs, falling short of market expectations for a 60,000 increase and easing from November’s revised 56,000 gain. Meanwhile, the Unemployment Rate ticked lower to 4.4% from 4.6%, coming in below forecasts of 4.5%.
Average Hourly Earnings rose 0.3% MoM in December, matching expectations and improving from November’s 0.1% increase. On an annual basis, earnings growth accelerated to 3.8% from 3.6%, also coming in above forecasts.
The preliminary University of Michigan Consumer Sentiment Index rose to 54 in January from 52.9 in December, beating market expectations of 53.5. The reading marked its highest level since September 2025. The Consumer Expectations Index also edged higher, rising to 55 from 54.6.
At the same time, inflation expectations remained firm in the survey. One-year Consumer Inflation expectation held at 4.2% in January, slightly above the 4.1% forecast and unchanged from December. Meanwhile, the five-year inflation outlook rose to 3.4% from 3.2%, also coming in above expectations of 3.3%.
Overall, the data painted a mixed picture of the US economy, with slowing job growth contrasting with a lower Unemployment Rate, steady wage growth, improving consumer sentiment, and still-elevated inflation expectations. Taken together, the releases helped keep the US Dollar supported, reinforcing the view that the Federal Reserve (Fed) can afford to remain cautious on the timing and pace of further interest rate cuts.
Markets are still pricing in around two rate cuts this year. However, traders are now almost fully convinced that the Fed will keep rates unchanged at its January 27-28 meeting, while expectations for a March rate cut have eased. According to the CME FedWatch Tool, the probability of a March cut has slipped to 29.6%, down from 38.6% a day earlier.
Attention later on Friday turns to comments from Fed officials, with Minneapolis Fed President Neel Kashkari and Richmond Fed President Thomas Barkin scheduled to speak, which could offer further guidance on the monetary policy outlook.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.