USD/JPY declines as US Dollar falters on soft data, Yen gains stability

• The US Dollar weakens after softer-than-expected US consumption and labor cost data.
• The Japanese Yen stabilizes as political risks ease and authorities maintain a vigilant stance.
• US rate cut expectations pressure the pair ahead of key upcoming data releases.

USD/JPY trades around 154.40 on Tuesday at the time of writing, down 0.95% on the day. The pair remains under pressure as the US Dollar (USD) is dragged lower by a series of disappointing US macroeconomic indicators, while the Japanese Yen (JPY) benefits from a more stable political backdrop and verbal support from authorities.

In the United States (US), the latest consumption data reinforce concerns about a slowdown in domestic demand. December Retail Sales are flat on a monthly basis at 0%, missing market expectations for a 0.4% increase. On a yearly basis, Retail Sales growth eases to 2.4%, down from 3.3% previously. More worrying for growth prospects, the Retail Sales control group, which feeds directly into Gross Domestic Product (GDP) calculations, falls by 0.1% on the month, reversing November’s 0.2% rise. Retail Sales excluding autos also come in at 0.0%, well below forecasts.

The labor market also sends mixed signals. The Employment Cost Index, published by the US Bureau of Labor Statistics (BLS), slowed to 0.7% in the fourth quarter from 0.8% previously. This indicator, closely watched by the Federal Reserve (Fed), is seen as a key gauge of labor market tightness and underlying inflation pressures. Meanwhile, the four-week average of the ADP Employment Change edges higher but remains at modest levels, suggesting a gradual loss of momentum in job growth.

Against this backdrop, the US Dollar extends its decline for a third consecutive session. The US Dollar Index (DXY), which measures the Greenback against a basket of major currencies, trades near a more than one-week low, reflecting growing expectations of monetary easing. Investors now turn their attention to major upcoming releases, with Nonfarm Payrolls due on Wednesday and the Consumer Price Index scheduled for Friday. Markets are currently pricing in around 50 basis points of rate cuts over the coming period.

On the Japanese side, the Japanese Yen finds notable support. Political risks have eased following the decisive and historic election victory of Prime Minister Sanae Takaichi, with her Liberal Democratic Party securing 316 of the 465 seats in the lower house. The strong mandate has reassured investors, particularly as she has signaled plans to fund tax cuts without increasing public debt, easing concerns over fiscal slippage.

At the same time, Japanese authorities continue to provide verbal backing to the currency. The Ministry of Finance has reiterated its readiness to act against excessive currency moves, a message echoed by senior officials and offering near-term support to the Yen.

According to HSBC, this environment creates a delicate balance for the Japanese currency. The bank notes that the strong political mandate opens the door to various fiscal choices, while maintaining its base case for a 25-basis-point rate hike by the Bank of Japan (BoJ) in July, with rising risks of an earlier or additional move.