USD/JPY holds steady close to its highest level in a year as traders reduce expectations for imminent Fed rate reductions

USD/JPY Continues Upward Momentum as US Dollar Strengthens

The Japanese Yen (JPY) continued to weaken against the US Dollar (USD) on Friday, marking the fourth consecutive day of gains for the USD/JPY pair. The US Dollar’s rally has been fueled by recent American economic data, pushing the pair to trade near 158.00—its highest point since January 2025—and setting the stage for a second week of advances.

US Labor Market Shows Mixed Signals

According to the US Bureau of Labor Statistics, job creation slowed in December, with only 50,000 new positions added, missing the anticipated 60,000 and down from November’s 64,000. Despite this, the Unemployment Rate edged down to 4.4%, beating expectations of 4.5% and improving from the previous 4.6%.

Wages and Consumer Sentiment Improve

Average Hourly Earnings increased by 0.3% month-over-month in December, aligning with forecasts and improving from November’s 0.1% rise. On a yearly basis, wage growth accelerated to 3.8%, surpassing both the prior month’s 3.6% and market predictions.

The preliminary University of Michigan Consumer Sentiment Index climbed to 54.0 in January, up from 52.9 in December and exceeding the expected 53.5. This marks the highest reading since September 2025. The Consumer Expectations Index also saw a modest rise to 55.0 from 54.6.

Inflation Expectations Remain Elevated

Survey results indicated that inflation expectations remain stubbornly high. The one-year consumer inflation outlook stayed at 4.2% in January, slightly above the projected 4.1% and unchanged from December. The five-year inflation forecast increased to 3.4%, up from 3.2% and higher than the anticipated 3.3%.

Implications for US Dollar and Federal Reserve Policy

Altogether, the data presents a nuanced view of the US economy: while job growth has slowed, the unemployment rate has fallen, wage growth is steady, consumer confidence is improving, and inflation expectations remain high. These factors have continued to support the US Dollar and suggest that the Federal Reserve may maintain a cautious approach regarding future interest rate reductions.

Market Expectations for Interest Rates

Investors are still anticipating roughly two rate cuts this year. However, sentiment has shifted, with most now expecting the Fed to leave interest rates unchanged at its January 27-28 meeting. The likelihood of a rate cut in March has also diminished, with the CME FedWatch Tool showing the probability dropping to 29.6%, down from 38.6% the previous day.

Upcoming Fed Commentary

Later on Friday, market participants will be watching for remarks from Minneapolis Fed President Neel Kashkari and Richmond Fed President Thomas Barkin, which may provide further insight into the central bank’s policy outlook.