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The ISM Services index fell 1.2 points to 52.8 in January, slightly short of the 54.0 consensus was expecting. However, fourteen industries out of eighteen reported growth, up from nine in December and back in line with November.

Business activity tumbled last month, falling 3.5 points to 54.5, more than giving back last month's improvement and registering its lowest level since August. New order growth also slowed (51.3 vs. 54.4 in December) and, apart from a contraction in June 2024, registering its weakest reading in two years.

The employment sub-index ticked up 52.3, suggesting that payrolls continued to expand in January.

The prices paid sub-component fell sharply (-4.0 points to 60.4). However, when excluding the jump last month, the index is at its highest level since January of last year, suggesting growing price pressures.

Key Implications

Some give back in the services sector to start 2025, but not a bad report on the whole. The share of industries expanding rose last month and employment continued to tick higher. The waning momentum in new demand is a fly in the ointment, but the report cited poor weather conditions as impacting business in January, so there may be room for recovery next month.

The outlook for the rest of the year is clouded by uncertainty. Momentum in the services sector has carried through to the start of 2025, but the prospect of tariffs on inputs continues to loom. Another leg higher in input prices, coupled with a still tight labor market could work to sustain inflationary pressure. All eyes now turn to Friday's update on the labor market.

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Conclusion:

A Powerful Tool in the Trader's Arsenal

Trading signals can be a valuable asset for traders of all levels, offering enhanced decision-making, time efficiency, and access to expert knowledge. However, it's crucial to approach trading signals with a healthy dose of skepticism and conduct thorough due diligence before subscribing to any service. By using signals responsibly and in conjunction with your own analysis and risk management strategies, you can leverage their potential to improve your trading performance and increase your chances of success in the dynamic world of trading. Remember, trading signals are a tool, and like any tool, their effectiveness depends on how they are used. The key lies in combining the insights they offer with your own knowledge, discipline, and a well-defined trading plan.

• USD/JPY is testing a crucial support level.
• BOJ rate hike expectations are growing on the back of strong data.
• Key support levels are at 151.53 and 150.00, while resistance levels are at 153.91, 155.00, and 156.27.

USD/JPY has found some support following a 150 pip drop during the Asian and early European sessions. The pair has found some support at a key confluence level where both the 100 and 200-day MA rests.

Will we get a break or bounce off this key level?

Japanese PMIs and Fundamental Backdrop

After Tokyo’s core CPI hit 2.5%, the BOJ raised interest rates by 25bps and hinted at more hikes to curb Yen weakness against the Dollar. Since then the Yen has made a steady move higher with another positive coming from the services PMI data which kept growing in January, hitting its highest point since September 2024 and staying in the growth zone for three months in a row. Employment and prices charged also went up, showing strong job conditions and steady inflation ahead.

The Yens renewed strength today however came courtesy of strong wage growth data which further supports Bank of Japan rate hikes moving forward.

Workers’ cash earnings went up more than expected in December, and November’s numbers were revised higher. If Shunto wage talks match last year’s strong results, there is a growing belief that the Bank of Japan might raise interest rates by 25 basis points as early as May.

Economic Data Ahead

The major data release left for this week will come on Friday with the US NFP jobs report and average earnings data.

There is a possibility that the US jobs market may start to tighten if companies see uncertainties from potential trade wars continue to grow. For now though I do not expect any significant surprise from the NFP data on Friday.

Technical Analysis USD/JPY

From a technical standpoint, USD/JPY is currently trading at a key confluence level where both the 100 and 200-day MAs rest.

A daily candle close below this level could be a precursor for further downside which is further enforced by the growing belief in further rate hikes from the BoJ.

USD/JPY Daily Chart, February 5, 2025

Source: TradingView (click to enlarge)

Dropping down to the four-hour chart (H4) and there is further support which rests at 151.53 before the psychological 150.00 handle comes into focus.

There are some concerns here for bears with the RSI 14-day on the H4 chart in oversold territory.

Also from a price action perspective, the selloff was quick and does leave the pair with a possibility of a short term pullback toward immediate resistance at 153.911 before the 155.00 handle comes back into view.

USD/JPY Four-Hour (H4) Chart, February 5, 2025

Source: TradingView (click to enlarge)

Support

• 151.53
• 150.00 (psychological level)
• 148.64

Resistance

• 153.91
• 155.00
• 156.27

ECB Chief Economist Philip Lane emphasized the need for a balanced approach in the easing cycle, advocating a measured pace to avoid either stifling economic growth or fueling excessive inflation.

He highlighted that a "middle path is appropriate," ensuring that policymakers do not lean too heavily on either upside or downside risks.

Lane reiterated the importance of maintaining flexibility, stressing that the ECB must "maintain agility" in its decision-making, relying on incoming data and a meeting-by-meeting assessment rather than committing to a predefined rate path.

The economist also pointed out that determining the appropriate level of monetary restrictiveness is complex and involves multiple factors beyond just policy rates.

He outlined nine key elements, including the transition from cheap debt refinancing to higher rates, the forward-looking impact of expected rate cuts, global term premium pressures, evolving bank lending conditions, and the overall response of consumption and investment to shifting monetary policy.

This multi-faceted assessment indicated that ECB rate decisions will be guided by a broader set of financial and economic indicators.

It "cannot be summarised by a single indicator such as comparing the prevailing policy rate to a highly-uncertain estimate of the so-called neutral rate," Lane emphasized.

Full speech of ECB's Lane here.

• January’s job growth could dip below 200K.
• The labor market remains strong overall.
• USD/JPY in bearish mode; a single rate cut still provide support.

The first Nonfarm Payrolls (NFP) report of the year –and the last of Biden’s era –will be published this Friday, making it a key event for traders. Trump’s escalating-de-escalating tariff policies have dominated market sentiment, this jobs report could still fuel fresh volatility.

Next Fed rate cut on hold

While a risk-off mood could stay in play as a US-China trade war is on hold and investors are uncertain about how soon and if trade negotiations between the US and its neighbors Mexico and Canada will bear fruit before the monthly deadline, fundamentals may take center stage in the coming sessions. The Fed kept interest rates steady after three consecutive cuts – starting with a bold 50bps reduction in September - but left traders wondering when the next move will take place.

Futures markets are pricing in 46bps of rate cuts by year-end – almost two additional cuts – but recent Fed commentary suggests the central bank may not rush to further ease monetary policy. With inflation expectations turning higher and economic indicators holding firm, the Fed may hesitate to drive interest rates lower. Following the stickiness’ in December’s core PCE price index, the ISM manufacturing PMI survey for January suggested that inflation pressure remains alive, and the economy is growing at a heathy pace, with the manufacturing sector finally contributing to the expansion after remaining stagnant for two years.

What to watch on Friday

The NFP report is projected to show that 170K new jobs were added in January – a slower pace than December's 256K. However, the unemployment rate is expected to hold near historic lows at 4.1% , and average hourly earnings may tick down to 3.8% from 3.9% previously, staying within the 2024 range.

Historically, January has delivered strong job gains above 200K, both pre-pandemic and in the past two years. A downside surprise could spark a dollar sell-off, pushing traders to fully price in a second rate cut - especially if the unemployment rate rebounds and wage growth slows at a faster pace. In this scenario, USDJPY could accelerate its decline, breaking below the 200-day EMA at 152.17. A breach of the 151.50 support level could open the door for a drop towards 149.10.

In the event of a classic stronger-than-expected report, showing more than 200k new jobs, the odds of a second rate cut could diminish, offering relief to USDJPY. However, a rally towards the constraining 20-day exponential moving average at 155.20 remains to be seen, especially as Japanese wage data keeps a rate hike by the BoJ on the table.

The bigger picture

The Fed is likely to stay on hold unless inflation moves convincingly towards its 2.0% target and the outlook on fiscal and trade policies becomes clearer. While the total number of rate cuts for 2025 remains a puzzle, a single cut could stay in play, even if Friday’s jobs report beats expectations by a wide margin as the year has just started. In such a scenario, the U.S. dollar could advance, particularly against the European and antipodean currencies, which are vulnerable to a relatively more aggressive monetary easing.

Markets

The ECB updated its wage tracker, published a first time after last December’s policy meeting. The headline indicator’s path is broadly unchanged with wages expected to remain sticky in Q1 and Q2 of this year (4.9% Y/Y and 4.5% Y/Y respectively) before “collapsing” in the second half of next year to 2.2% Y/Y in Q3 and 1.5% Y/Y in Q4 (marginally up from 1.4% in December). Just like January CPI’s on Monday (marginally above consensus) they won’t really move the needle in the ECB’s compass. That leaves Friday’s staff paper on neutral rates as the one to watch. The pre-pandemic 1.75%-2.50% for R* risks seeing a higher bottom with implication on the central bank’s policy path beyond the expected 25 bps rate cut in March (to 2.5%). If any, it suggests that the current implied market rate bottom by year-end (1.75%) is too low. While being at the topic of the ECB, it’s maybe worth mentioning an article published today at the central bank’s blog titled “What happens when US and euro area monetary policy decouple?”. The authors conclude that spillovers from US monetary policy initially work in the opposite direction to ECB monetary policy, but then later in the same direction. For instance, a surprise tightening of US policy leads to an initial increase in euro area inflation (on average over the three months after the announcement) as the euro weakens. However, over time, tighter US monetary policy drags down euro area inflation much like tighter ECB policy would. The blogpost thus suggest that the ECB should hold its nerve and look through the initial inflationary impact in such scenario. Markets didn’t respond to the ECB data releases, but interest rates did show sensitivity to comments from ECB chief economist Lane. He warned that the inflation slowdown might take longer than thought and that the ECB must avoid moving too slowly, to avoid hurting the economy, or too quickly as new upside inflation risks might emerge. The comments, coming from a known dove on the ECB board, caused an underperformance at the front end of EUR rate curves, which erased daily losses of up to 5 bps to currently trade flat on the day. The euro failed to profit, trading flat in the 1.04 area. US eco data lost importance at the volatile start of Trump 2.0 especially since Fed governors collectively steer in the direction of a prolonged pauser to counter any inflationary risks. January ADP employment change showed another solid 183k job gain (vs 150k expected) including an upward revision (176k from 122k) to December data. The US services ISM is up for release later today. General risk sentiment turned again somewhat more sour with (very) long core bonds profiting the most. First questions are being raised over whether the US economy will be able to weather the president’s explosive policy mix.

News & Views

Czech retail sales unexpectedly showed strong momentum at the end of 2024. Retail trade (except motor vehicles) in real terms rose 1.2% M/M and 6.2% Y.Y. In a monthly perspective, sales growth was rather broad-based with non-food sales up 1.5%, food sales adding 1.1% and sales of automative fuels rising by 0.2% M/M. For the whole of 2024 sales in real terms were 4.6% higher compared to 2023. The Czech Statistical Office indicated internet and mail-order houses as the biggest contributor of overall sales. The substantial overall Y/Y rise is partially due to a lower comparison base in 2023, but suggests that domestic demand has regained traction. Tomorrow, January Czech CPI data will be published while the Czech National Bank announces the outcome of its monetary policy meeting. The CNB is largely expected to further reduce/finetune its policy rate from 4% to 3.75 after having taken a pause at the December meeting. At EUR/CZK 25.13, the koruna extends a short-term rebound after declining due to overall uncertainty on global trade/US tariffs on Monday.

The National Bank of Poland kept its policy rate unchanged at 5.75%. The decision occurred as the communication from MPC members recently suggested some growing internal debate on how long the current status quo in the policy rate will have to last. Governor Glapinski advocated a higher-for-longer stance as inflation remains well above target and as the government is removing price caps on energy, likely keeping inflation at elevated levels throughout the end of this year. However, other MPC members suggested that the MPC might consider debating rate cuts later this year considering the overall outlook on inflation. At EUR/PLN 4.20 the zloty is trading at the strongest levels against the euro since April 2018. The NBP will publish its policy statement after finishing this report.

US ISM Services PMI declined from 54.0 to 52.8 in January, falling short of market expectations of 54.2.

The drop was driven primarily by slower growth in business activity and new orders, both of which saw noticeable declines. Business activity/production slipped from 58.0 to 54.5, while new orders dropped from 54.4 to 51.3. Meanwhile, employment edged higher from 51.3 to 52.3, and prices eased from 64.4 to 60.4, suggesting some moderation in inflationary pressures within the service sector.

According to ISM, the weaker composite reading reflects a slowdown in business momentum, with adverse weather conditions frequently cited by respondents as a factor dampening production and demand. While concerns over potential US government tariffs were mentioned, businesses did not yet report significant direct impacts.

The decline in services activity points to some softening in economic momentum, though the sector remains in expansion territory above the 50.0 threshold. Current Services PMI reading aligns with an annualized GDP growth of 1.4%, suggesting moderate economic expansion.

Full US ISM services release here.

Daily Pivots: (S1) 153.84; (P) 154.68; (R1) 155.18; More...

Intraday bias in USD/JPY remains on the downside for 38.2% retracement of 139.57 to 158.86 at 151.49. Strong support could be seen from there to complete the corrective fall from 158.86 and bring rebound. But further fall will remain in favor as long as 155.51 resistance holds, in case of recovery. Sustained break of 151.49 will raise the chance of bearish reversal.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). The range of medium term consolidation should be set between 38.2% retracement of 102.58 to 161.94 at 139.26 and 161.94. Nevertheless, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 0.9015; (P) 0.9082; (R1) 0.9117; More…

USD/CHF dips further today as consolidation from 0.9200 extends, but stays well above 0.8956/64 support. Intraday bias stays neutral first. Outlook will remain bullish as long as 0.8956/64 support holds. Firm break of 0.9200/9223 will resume the whole rally from 0.8374 and carry larger bullish implication. However, sustained break of 0.8964 will complete a double top reversal pattern, and turn bias to the downside for deeper decline.

In the bigger picture, decisive break of 0.9223 resistance will argue that whole down trend from 1.0342 (2017 high) has completed with three waves down to 0.8332 (2023 low). Outlook will be turned bullish for 1.0146 resistance next. Nevertheless, rejection by 0.9223 will retain medium term bearishness for another decline through 0.8332 at a later stage.

Daily Pivots: (S1) 1.2410; (P) 1.2451; (R1) 1.2524; More...

GBP/USD's corrective rebound from 1.2099 extends through 1.2522. But upside is still expected to be limited by 38.2% retracement of 1.3433 to 1.2099 at 1.2609. On the downside, break of 1.2248 support will bring retest of 1.2099 first. Firm break there will resume whole decline from 1.3433. However, decisive break of 1.2609 will raise the chance of near term reversal, and target 61.8% retracement at 1.2923.

In the bigger picture, rise from 1.0351 (2022 low) should have already completed at 1.3433 (2024 high), and the trend has reversed. Further fall is now expected as long as 1.2810 resistance holds. Deeper decline should be seen to 61.8% retracement of 1.0351 to 1.3433 at 1.1528, even as a corrective move. However, firm break of 1.2810 will dampen this bearish view and bring retest of 1.3433 high instead.