The Bank of Japan (BOJ) Governor Ueda has made it clear that any decision on monetary tightening will depend on more robust economic data, particularly sustained wage growth.
In recent data, Japan witnessed its largest annual base salary increase in 32 years, with a notable 2.7% rise year-on-year in November. Nominal wages, outpacing expectations, climbed by 3%, signalling a robust labour market. Excluding bonuses and overtime, wages for full-time workers rose by 2.8%, maintaining a healthy 15-month streak above 2%. This growth, if sustained through the annual spring wage negotiations, could compel the BOJ to rethink its dovish stance, given that wage increases directly influence household spending and inflation.
The forthcoming negotiations led by Rengo, Japan’s largest trade union federation, come with elevated stakes. Last year’s negotiations catalyzed the BOJ’s first rate hike in 17 years. With Rengo pushing for further hikes, this year’s outcomes could bolster inflationary pressures, forcing the BOJ into a policy pivot. Compounding this are Prime Minister Shigeru Ishiba’s efforts to raise Japan’s minimum wage to ¥1,500 within five years, which may signal a policy environment that complements higher wages with structural reforms.
We see that household spending data echoes these developments, describing a buoyant economy fueled by rising wages. Stronger-than-expected consumption metrics underline a resilient domestic sector, making Japan’s recovery narrative increasingly credible. If these trends persist, the BOJ may face heightened pressure to act by its January 24 meeting.
While not without its opportunities, a monetary tightening scenario could have profound implications for the Japanese yen. We’ve seen how yen appreciates with hawkish BOJ moves in the past; particularly when juxtaposed against the Federal Reserve’s cautious tone on interest rates.
With these macroeconomic themes in focus, we now pivot to the charts to see how it has performed in light of these developments.
The U.S. Dollar Index (USDX) continues to hold investor focus, ending the week near the critical 109.60 level. This consolidation suggests a potential bullish continuation if the index sustains support around 109.00 or 108.40. However, should the USDX attempt a new swing high and approach the 110.40 resistance, traders will likely watch for bearish patterns, signaling possible reversals.
In the EUR/USD pair, we see that bearish momentum has dominated, pushing the euro to a new swing low around 1.0200. While traders may anticipate a rebound at this level, consolidation above 1.0300 could invite renewed selling pressure.
Similarly, GBP/USD showed resilience around 1.2200. Yet, with limited bullish momentum, the pound may encounter significant resistance at 1.2300 and 1.2350, with 1.2120 as a potential support zone in the event of a pullback.
With this week’s developments, the USD/JPY pair offered a strikingly narrow movement just above the critical sell zone of 158.65, suggesting traders are treading cautiously ahead of BOJ-related announcements. Should the pair consolidate, the next area of interest lies near 156.80. Conversely, a break beyond 159.44 could shift sentiment toward further yen weakness.
Commodity-linked currencies like AUD/USD and NZD/USD also saw renewed bearish sentiment this week. The Australian dollar hit fresh lows, with consolidation expected near 0.6185 and potential support around 0.6020. The New Zealand dollar followed a similar trajectory, with traders eyeing bearish setups at 0.5590 and the possibility of a break below 0.5512 before any recovery materializes.
Meanwhile, USD/CAD made modest gains without reaching monitored buy zones, suggesting continued upside toward 1.4350. However, if the pair moves to test the 1.4559 high, traders may look for bearish opportunities to emerge.
Crude oil climbed above the 77.30 mark in the commodities space, reinforcing bullish momentum. While price consolidations near 73.30 could present buying opportunities, oil markets remain wary of retesting lows around 66.93 or 65.50 before any sustained move upward.
Gold prices lingered near 2685 but displayed hesitation to attract sellers. Traders are closely monitoring 2700 and 2710 as critical levels for bearish action, while a rally toward 2726.19 may reaffirm the precious metal’s resilience.
On Tuesday, the U.S. Manufacturing PMI is set to take centre stage, with a forecast of 0.4% matching the previous reading. If the data meets or exceeds expectations, we think this could provide a supportive backdrop for the USDX, which has already shown signs of upward momentum. A weaker result, however, could prompt a reassessment of bullish positions.
Wednesday will shift the spotlight to inflation data, with the U.K. and U.S. releasing their CPI figures. In the U.K., the CPI is forecasted to remain steady at 2.6% year-over-year. Should inflation come in flat or lower, GBP/USD may face additional downward pressure, especially given its recent struggle around its current level.
Meanwhile, the U.S. CPI is expected to rise to 2.9% from the previous 2.7%. Such an increase would likely reinforce the dollar’s strength, nudging the USDX closer to its next key levels and possibly weighing on risk-sensitive assets like equities and commodities.
Thursday brings GDP data for the U.K. and retail sales for the U.S. The U.K.’s GDP forecast of 0.2% marks a rebound from the prior -0.1%. If this materializes, it could lend some short-term support to the pound, particularly if GBP/USD revisits support areas like 1.2120.
On the U.S. side, retail sales are projected to decelerate slightly to 0.6% from 0.7%. This modestly weaker outlook might temper the dollar’s rally, but much will depend on the broader context of risk sentiment and inflation trends.
With no major economic releases scheduled for Monday or Friday, we believe the midweek data deluge will be pivotal in defining the market’s direction.
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