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[MARKET ANALYSIS] JPY dragged on reports PM Takaichi raised reservations about rate hikes to BoJ Governor Ueda, DXY slightly firmer

The recent reports regarding PM Takaichi's reservations about further rate hikes have put substantial pressure on the JPY, contributing to USD/JPY trading near its upper range.

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[MARKET ANALYSIS] JPY dragged on reports PM Takaichi raised reservations about rate hikes to BoJ Governor Ueda, DXY slightly firmer

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  • DXY is mildly firmer this morning, and trades at the mid-point of a 97.69-97.95 range; the high of the day is a pip above its 50 DMA. The theme in the US remains firmly on a) the trade situation and b) the growing woes surrounding AI – spurring increased uncertainty about the US economy, and hence the USD. Nonetheless, the index is firmer this morning, largely thanks to considerable pressure in the JPY (more on that below). For the time being, focus will be on some Tier 2 US data including Consumer Confidence, Richmond Fed Index and ADP Employment Change Weekly – Fed speak today includes, Waller (voter, dove), Cook (voter, neutral), Barkin (2027 voter, neutral), Goolsbee (2027 Voter, Dovish), Bostic (retiring, hawk), Collins (2028 voter, neutral). Thereafter, US President Trump is set to deliver his State of the Union address, where he is expected to speak on the economy, new policies and potentially trade (02:00 GMT Wednesday / 21:00 EST Tuesday).
  • JPY is shunned today, currently off by around 0.8%, with USD/JPY trading at the upper end of a 154.52 to 156.27 range – the pair currently trades around its 50 DMA at 155.97. Overnight pressure stemmed from reports that US Treasury Secretary Bessent initiated rate checks, rather than at the request of the Japanese. The weakness in JPY was then exacerbated by source reports that PM Takaichi relayed to BoJ Governor Ueda her reservations about further rate hikes; she was reportedly "stricter than at the previous meeting", in November. As a reminder, the PM and Ueda met last week, where traders assigned some risk that the PM would ask Ueda to cull future rate hikes; despite this, Ueda suggested that the PM "didn't have any particular requests".
  • It is worth reminding that the recent strength in the JPY has been spurred by, a) political stability post-Takaichi victory, b) increased probability of a BoJ hikes, c) Ueda seemingly suggesting that the PM did not have particular requests. Therefore, the source report mentioned above carries great weight, and if it is not pushed back on – there is a chance that much of the recent strength in the JPY could be unwound. Markets now assign a 72% chance of a hike in June (prev. 80%), and now fully prices in a 25bps hike in September (prev. July).
  • The post-election high for USD/JPY resides at 157.66, still a far cry away from the current 155.95 mark. But there are other bearish factors for the JPY, including, a) China blacklisting some Japanese firms, b) the renewed trade uncertainty, following Trump’s blanket 15% tariffs; the likes of GS suggested Japan would be amongst the worst off.
  • Finally, G10 peers are broadly incrementally firmer/flat against the USD. Antipodeans benefit from the constructive sentiment seen in the APAC session, and as base metals remain bid. EUR/USD remains steady within a narrow 1.1767-1.1796 range; the low for today is a handful of pips below its 50 DMA at 1.1772.
Context

This signals a shift in market sentiment as traders recalibrate their expectations for future monetary policy, with a notable decrease in rate hike probability for June. The implications for the JPY could be profound if these concerns about rate hikes persist, potentially reversing its recent strength and impacting broader risk sentiment.

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