JPY gains versus USD amid political tensions

Today’s headlines

What’s happening: The Japanese yen edged higher versus the US dollar on Tuesday, following heightened volatility in the previous session.

What happened: Japan’s Prime Minister Sanae Takaichi announced plans to dissolve the parliament this week.

Weakness in the US dollar also lent support to the forex pair this morning.

Why it matters: The first Japanese woman premier called a snap general election on February 8 to gain voter support for her broader policies, banking on her high poll numbers. The vote will mark Takaichi’s first electoral test since she took over as Prime Minister in October.

Investors continued monitoring comments from Bank of Japan’s policymakers, ahead of the policy meeting this week. The Japanese central bank is widely expected to keep its benchmark interest rate unchanged after the hike in December.

The yen was supported by growing speculations of a potential intervention by the Japanese authorities in the currency market, triggered by concerns around the impact of yen’s weakness on inflation.

Data released on Monday showed that Japan’s core machinery orders declined 11% to ¥883.9 billion in November, after a 7% rise in October. This marked the steepest decline since April 2020. The latest reading also came in much weaker than market estimates of a 5.1% decline.

Japan’s industrial production contracted by 2.7% in November, following 1.5% growth in October. This too marked the sharpest decline since January 2024. The Tertiary Industry Index for Japan fell to 105.50 points in November, from 105.70 points in the previous month.

Meanwhile, the dollar remained under pressure due to rising tensions between the US and Europe over President Donald Trump’s proposal to acquire Greenland. The US dollar index, which measures the greenback’s performance versus a basket of major peers, fell more than 0.3% to 99.06.

The USD/JPY forex pair fell around 0.1% to 157.98 this morning.

What to watch: Investors will continue monitoring the political situation in Japan, which is expected to significantly impact the yen.

Data on Japan’s balance of trade, inflation rate and S&P Global composite PMI will be released later during the week. Japan’s annual inflation rate, which eased to 2.9% in November from October’s three-month high of 3.0%, is expected to fall further to 2.7% in December. Analysts expect Japan’s S&P Global composite PMI to decline to 50.9 in January from 51.1 in December.

The Bank of Japan is scheduled to announce its policy decision on Friday. Markets will keep an eye on any hawkish comments from Japan’s Governor Kazuo Ueda amid prospects of a rate hike in June.

The markets today

Germany’s stocks in focus today ahead of some major economic reports

Context: Equity markets in Germany fell to their lowest level since January 6, amid renewed US-EU trade tensions.

Details: US President Donald Trump said the 10% tariffs levied on imports from Europe may be increased to 25% until an agreement is reached for the purchase of Greenland. The European Union is looking to impose retaliatory tariffs on €93 billion worth of US products.

Auto stocks recorded sharp losses on Monday, with shares of BMW, Porsche, Volkswagen and Daimler Truck moving lower. Banks and tech-related shares also came under pressure during the session.

Meanwhile, data released on Monday showed that Eurozone’s consumer price inflation slowed to 1.9% in December from 2.1% in the previous month. The figure was below the preliminary reading of 2.0%. It marked the first time since May 2025 that the region’s inflation level came below the European Central Bank’s 2% target. This triggered speculations of the ECB keeping its benchmark interest rates unchanged for an extended period.

The annual core inflation rate in the Eurozone eased to a four-month low of 2.3% in December from 2.4% in the previous month.

Germany’s DAX 40 dipped 1.34% to close at 24,959.06 on Monday, while the STOXX Europe 600 Index tumbled 1.19% to 607.06.

What to watch: Investors await the release of economic data on Germany’s ZEW economic sentiment index (1400 UAE Time) and ZEW current conditions (1400 UAE Time) today. Germany’s ZEW indicator of economic sentiment, which jumped to 45.8 in December from 38.5 in the previous month, is expected to rise again to 50 in January. Analysts expect Germany’s ZEW indicator of current conditions to improve slightly to -75.5 in January from -81 points in the previous month.

Rising trade tensions between the US and EU will remain in focus.

Other Markets: US trading indices closed lower on Friday, with the Dow Jones index, S&P 500 and Nasdaq 100 down by 0.17%, 0.06% and 0.07%, respectively.

The news shaping the markets

Russia launched various drone attacks on Ukraine’s energy infrastructure, which cut off power in five regions amid sub-zero temperatures. The news sent the USD/RUB pair lower in forex trading this morning.

The People’s Bank of China kept its key lending rates unchanged at record lows for the eighth month in a row, which exerted pressure on the USD/CNY forex pair.

New Zealand’s BusinessNZ Performance of Services Index surged to 51.5 in December from 46.9 in the previous month, sending the NZD/USD pair higher in forex trading this morning.

South Korea’s producer prices surged 1.9% year-over-year in December. This being the strongest rise since July 2024 lent support to the USD/KRW forex pair.

The International Monetary Fund raised India’s economic growth outlook by 0.7 percentage points to 7.3% for fiscal 2026. However, the USD/INR pair rose in forex trading this morning.

What else to watch today

Eurozone’s current account (1300 UAE Time), ZEW economic sentiment index (1400 UAE Time) and construction output (1400 UAE Time), Italy’s current account (1300 UAE Time), Spain’s balance of trade (1300 UAE Time), South Africa’s gold production (1330 UAE Time), mining production (1330 UAE Time), US ADP employment change weekly (1715 UAE Time), Turkey’s central government debt (1830 UAE Time), as well as Argentina’s balance of trade (2300 UAE Time).