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• Yen falls sharply on reports PM Takaichi is planning election.
• The slide triggers fresh intervention warnings.
• Investors push back their BoJ rate hike bets.
• Intervention alone may not be enough to save the day.

Yen accelerates downtrend amid Japan election jitters

Bank of Japan policymakers left 2025 wearing their hawkish suits after they raised interest rates to the highest level in three decades and signaled willingness to take them even higher. However, the Japanese yen was not able to capitalize on the Bank’s hawkish decision, perhaps as traders wanted more specific clues as to when officials were planning to hit the hike button next.

To make things even worse, the yen accelerated its downfall to territories last seen back in July 2024 after Kyodo News reported that Prime Minister Sanae Takaichi has told a senior member of the Liberal Democratic Party that she is thinking about calling a snap election in February.

With an approval rating of around 70%, she may be confident about a victory that will allow her to proceed more freely with her spending plans, which would add to the already ballooned government debt. That’s maybe why the yen is tumbling, while equities and Japanese Government Bond (JGB) yields are skyrocketing. This is the so-called “Takaichi trade” and may be intensified should the scenario of the LDP securing a single-party majority becomes even more likely.

Besides the prospect of a piling debt, what is also driving the yen lower may be expectations that the BoJ’s hands will be tied ahead of the election. The next interest rate hike may be delivered after the spring wage negotiations, and only if the negotiations result in satisfying salary increases.

Yen tumble reignites intervention talk

However, with dollar/yen headed towards the psychological zone of 160.00 again, the intervention discussion is back on the table. Finance Minister Satsuki Katayama said at a meeting with US Treasury Secretary Scott Bessent that she remains concerned about the “one-way weakening of the yen,” with Bessent sharing those concerns and calling for the BoJ to raise interest rates.

Katayama warned about intervention back in December, when dollar/yen emerged above 157.00, noting that Japan has a “free hand” to take action. Maybe she met with Bessent to get the green light, which means that an intervention episode near the 160.00 zone is more likely than previously thought.

However, even the new warning was not enough to stop the yen’s bleeding, which raises the question whether actual action could do the work. In 2024, Japanese authorities stepped into the market to prop up the yen four times, twice in April and twice in July. In April, the impact was temporary, with the yen soon resuming its slide. In July, the effect was more meaningful, with dollar/yen falling from around 162.00 to below 140.00 by September. The difference is that in the second case, the intervention actions were followed by a BoJ rate hike.

Will a possible election delay BoJ rate hikes?

Therefore, with Takaichi planning to increase spending and thereby pile up more debt, any intervention episode could also have limited and short-lived impact. A BoJ rate hike may also be needed, as a weaker yen could fuel inflation through higher export costs; and this could eventually weigh on economic growth.

Currently, according to Japan’s Overnight Index Swaps market (OIS), a 25bps rate hike is not fully pencilled in until September and if the Bank is indeed not planning to act soon, the yen is likely to continue suffering, with intervention not being able to change its fate. Yields are likely to continue rallying, as fewer investors will be willing to finance Japan’s ballooning debt. However, equities are unlikely to continue cheering Takaichi’s spending plans indefinitely. At some point, worries about inflation and economic slowdown could prompt investors to abandon Japanese stocks as well, in a so-called “Sell Japan” episode.

Therefore, unless the Finance Ministry decides to intervene and the BoJ to hike interest rates soon, the yen may be destined to extend its downtrend, and dollar yen may easily find itself trading above 160.00 soon.

Dollar/Yen may extend uptrend even after intervention

From a technical standpoint, dollar/yen is currently flirting with the 158.90 resistance, marked by the peak of January 10, 2025, where a clear close higher could encourage a test at the round figure of 160.00. The prevailing uptrend remains intact as marked by the uptrend line drawn from the low of September 17. A break above 160.00 could pave the way towards the high of July 3, 2024, at around 162.00. For a bearish reversal to start being considered, a decisive break below the 154.55 zone may be needed.

The Euro trades in a slower mode on Tuesday after previous day’s bounce temporarily sidelined larger bears (off 1.1808 peak).

Mixed signals from daily candlestick (bullish engulfing / strong upside rejection left bullish daily candle with long upper shadow) contribute to overall technical picture.

Momentum studies remain bearishly aligned and daily Tenkan/Kijun-sen formed bear-cross, along with still magnetic daily cloud twist, signal that near-term risk is still shifted to the downside.

Retest of cracked 50% retracement of 1.1468/1.1808 ascend (1.1638) and potential extension towards the top of thinning daily cloud (1.1623) might be likely near-term scenario, as long as the action is fueled by Monday’s bull-trap (above broken Fibo 38.2% at 1.1679) which also capped today’s action.

Although the dollar was hurt by fresh rally into safety that favored precious metals, today’s release of US economic data showed that inflation was practically unchanged and increased slightly less than expected in December, adding to expectations that the Fed would leave rates unchanged this month and keep the greenback underpinned.

Res: 1.1698; 1.1730; 1.1765; 1.1780.
Sup: 1.1650; 1.1638; 1.1618; 1.1598.

Markets

Distorted or not, that’s the question. It’s anyone’s guess at the moment which specific items in the CPI basket still face an impact from the US government shutdown which led the Bureau of Labour Statistics to skip the November CPI report. So markets simply responded Pavlov-style. Headline December inflation printed bang in line with consensus at 0.3% M/M and stabilizing at 2.7% Y/Y, but core CPI was marginally more benign than feared at 0.2% M/M and 2.6% Y/Y (unchanged). Consensus expected the core print similar to the headline one. Monthly details showed lower prices for gas (-0.5%), used cars & trucks (-1.1%) and education (-1%) being compensated by amongst others higher prices for rent (+0.4%), recreation (+1.2%) and airline fares (+5.2%). Overall services prices increased by 0.3% M/M and 3.3% Y/Y. US Treasuries and US equity futures spiked higher on the lower core CPI move but the move doesn’t really stick. Daily changes on the US yield curve are currently near unchanged. We continue to keep a close eye on the US 10-yr yield which seems on the verge of breaking through 4.2% resistance. The same goes for a very temporary dip in the US dollar. Focus for US investors now turns to US President Trump’s scheduled address at the Detroit Economic Club’s annual “Michigan Economic Outlook” session (8pm CET) where he might double down on (populist) proposals to boost affordability going into this year’s mid-term elections. JPMorgan Chase today warned already that Trump’s call for a 10% cap on credit card rates threatens to significantly change its business. They pushed back against the proposal when publishing robust Q4 2025 results. Bank of America, Wells Fargo and Citi report tomorrow.

USD/JPY rose just above the 2025 top (158.87) as the Takaichi trade gathers steam. The Japanese PM seems willing to exploit her popularity by calling snap elections in the lower house. The LDP currently lacks an outright majority but Takaichi hopes to secure that, helping to enroll her (stimulative) fiscal agenda. JPY weakens prompting first minor FX intervention warnings. USD/JPY 160(+) levels proved to be a trigger back in April-July 2024. The Japanese Nikkei rallied over 3% in a combination (with FI & FX) you don’t see that often. The Japanese yield curve bear steepened with yields rising by up to 8.7 bps at the 30-yr tenor which now surpasses the level of the German one (3.5% vs 3.46%). There are modest spillover effects to Europe and the UK as well though. Rising oil prices are at play as well at the long end of the curve with Brent crude topping $65/b for the first time since early October over rising geopolitical risks. US President Trump warned that Iran will pay a big price for killing protesters and cancelling all meeting with Iranian officials until the killing ends.

News & Views

Hungarian inflation in December slightly surprised to the upside with a 0.1% m/m increase and 3.3% annual print. The latter nevertheless marks a slowdown from 3.8% in November and in doing so closes in on the central bank’s 3% (+/- 1ppt) midpoint target. Central bank (MNB) measures of core inflation varied between 3.6% and 5.2% with most of them showing a deceleration from November as well. With favorable base effects kicking in these next few months and the central bank at the December meeting dialing back its hawkish tone, chances for additional rate cuts in the near future are growing. Markets, however, were running a bit ahead of themselves lately in terms of MNB expectations with the likes of the 2-yr swap hitting the lowest levels since October 2024 just yesterday. This stretched positioning helps explain today’s 7 bps increase at the short end of the curve. The forint swapped earlier losses from EUR/HUF 388+ to 386.7 currently.

Final Czech CPI confirmed the preliminary release at -0.3% m/m and 2.1% for December, bringing the average annual rate at 2.5% (slightly up from 2.4% in 2024). The numbers were accompanied by the central bank’s (CNB) core measure, which showed the monthly series rising by 0.2% to be up 2.8% in yearly terms. Within the core basket, goods price rises picked up from 0.2% in November to 0.4%, as did services from 4.3% to 4.5%. The CNB described services inflation as “elevated” and closely monitors the cost of owner-occupied housing (5% from 4.8% in the previous months). The CNB is forecasting a headline CPI drop below 2% this year, perhaps even for a longer period, but added that core inflation would remain broadly unchanged, at least at the start of 2026. The latter, mainly driven through services, shows that “price developments in the domestic economy have not yet fully stabilized and require tight monetary conditions.” The Czech koruna strengthens a tad to EUR/CZK 24.23. Swap yields rise 2.5 bps at the front.

Daily Pivots: (S1) 157.73; (P) 157.96; (R1) 158.41; More...

Intraday bias in USD/JPY remains on the upside for the moment. Sustained trading above 161.8% projection of 142.66 to 150.90 from 145.47 at 158.80 will pave the way to 200% projection at 161.95, which is close to 161.94 high. On the downside, below 157.88 minor support will turn intraday bias neutral first. But outlook will stay bullish as long as 156.10 support holds, in case of retreat.

In the bigger picture, corrective pattern from 161.94 (2024 high) could have completed with three waves at 139.87. Larger up trend from 102.58 (2021 low) could be ready to resume through 161.94. Decisive break of 158.85 structural resistance will solidify this bullish case and target 161.94 for confirmation. On the downside, break of 154.38 support will dampen this bullish view and extend the corrective range pattern with another falling leg.

Daily Pivots: (S1) 0.7949; (P) 0.7984; (R1) 0.8011; More….

Range trading continues below 0.8016 and intraday bias in USD/CHF remains neutral. Corrective pattern from 0.7828 low is extending. On the upside, above 0.8016 will target 0.8123 resistance next. Nevertheless, break of 0.7905 support will resume the fall from 0.8123 to retest 0.7828 low. Firm break there will resume larger down trend.

In the bigger picture, price actions from 0.7828 are seen as a correction. Larger down trend from 1.0342 (2017 high) is in still in progress. Break of 0.7828 will target 100% projection of 1.0146 (2022 high) to 0.8332 from 0.9200 at 0.7382. In any case, outlook will stay bearish as long as 0.8332 support turned resistance holds (2023 low).

Daily Pivots: (S1) 1.1625; (P) 1.1662; (R1) 1.1702; More….

No change in EUR/USD's outlook and intraday bias stays neutral. On the upside break of 1.1742 resistance will argue that pullback from 1.1807 has completed. Rise from 1.1467 should then be ready to resume. Further break of 1.1807 will pave the way to retest 1.1817 high. Nevertheless, on the downside, below 1.1617 will target 1.1467 support. Overall, price actions from 1.1917 are seen as a corrective pattern that might extend further.

In the bigger picture, as long as 55 W EMA (now at 1.1416) holds, up trend from 0.9534 (2022 low) is still in favor to continue. Decisive break of 1.2 key psychological level will carry larger bullish implication. However, sustained trading below 55 W EMA will argue that rise from 0.9534 has completed as a three wave corrective bounce, and keep long term outlook bearish.

Daily Pivots: (S1) 1.3409; (P) 1.3447; (R1) 1.3504; More...

GBP/USD is staying in range between 1.3389/3567 and intraday bias remains neutral. On the upside, break of 1.3567 will resume the rally from 1.3008 towards 1.3787 high. On the downside, break of 1.3389 will resume the fall from 1.3567. Sustained break of 55 D EMA (now at 1.3374) will argue that the decline is another falling leg in the corrective pattern from 1.3787. In this case, deeper fall should be seen back to 1.3008 support.

In the bigger picture, price actions from 1.3787 (2025 high) are seen as a correction to the larger up trend from 1.3051 (2022 low). Deeper decline could be seen as the pattern extends, but downside should be contained by 38.2% retracement of 1.0351 to 1.3787 at 1.2474 to bring rebound. Break of 1.3787 for up trend resumption is expected at a later stage.

Dollar gyrates in a tight range and remains an underperformer for the week, showing little reaction to December US consumer inflation data. With no meaningful downside surprise in the data, inflation figures effectively cemented expectations for a policy hold by the Fed at its upcoming meeting. Futures now assign around 95% probability that interest rates will remain unchanged at 3.50–3.75% at the January 28 FOMC decision.

Pricing for a March rate cut was also largely unchanged, hovering slightly above 70%. That pricing remains conditional, however, as policymakers will have two additional CPI prints in hand before deciding whether inflation is cooling fast enough.

A central question is whether tariffs could continue to feed into prices over the coming months, either lifting inflation or preventing further progress toward lower core readings. While the base case still calls for at least one more Fed cut later this year, the length of the current pause will depend on how persistent price pressures prove to be. Any sign that inflation is stabilizing rather than easing would argue for a longer hold, even if the easing cycle is not formally over.

Tariffs have returned to the macro conversation after US President Donald Trump threatened to impose a 25% tariff on countries doing business with Iran. The move risks reopening old geopolitical and trade tensions with China, Iran’s largest trading partner. Although Trump has not named China directly, renewed efforts to isolate Iran are likely to sharpen scrutiny of Belt and Road Initiative, where Iran plays a strategic role as a transit hub for Chinese goods into the Middle East under President Xi Jinping’s flagship project.

In FX performance terms this week, Yen sits firmly at the bottom of the ladder, followed by Dollar and then Euro. Kiwi leads gains, with Sterling and Swiss Franc also outperforming. Aussie and Loonie trade in the middle.

In Europe, at the time of writing, FTSE is down -0.09%. DAX is up 0.33%. CAC is down -0.14%. UK 10-year yield is up 0.19 at 4.394. Germany 10-year yield is up 0.019 at 2.863. Earlier in Asia, Nikkei rose 3.10%. Hong Kong HSI rose 0.90%. China Shanghai SSE fell -0.64%. Singapore Strait Times rose 0.85%. Japan 10-year JGB yield rose 0.07 to 2.167.

US CPI meets headline, core undershoots at 2.7% in December

US consumer inflation data for December delivered a largely reassuring signal. Headline CPI rose 0.3% mom, in line with expectations. Core CPI increased just 0.2%, undershooting forecasts for a 0.3% gain.

Shelter was the dominant driver of monthly inflation, rising 0.4% and accounting for the largest share of the overall increase. Food prices were also firm, with the food index climbing 0.7% on the month, matching gains in both food at home and food away from home. Energy prices edged up 0.3% in December, contributing modestly to headline pressures.

On an annual basis, CPI was unchanged at 2.7% yoy, matched expectations. CPI core unchanged at 2.6% yoy, below expectation of 2.7% yoy. Energy prices rose 2.3% yoy, while food inflation increased 3.1%.

Australia Westpac consumer sentiment deteriorates, RBA won't tighten precipitously

Australian consumer sentiment weakened further at the start of the year, highlighting growing anxiety over the interest-rate outlook. The Westpac Consumer Sentiment Index fell -1.7% mom to 92.9 in January, pushing sentiment deeper into pessimistic territory.

Westpac pointed to a sharp shift in rate expectations as the main drag. Nearly two-thirds of consumers who expressed a view now expect mortgage rates to rise over the next 12 months, more than double the share seen back in September.

For policy, Westpac expects the RBA to stay on hold when it meets on February 2–3, and through the remainder of 2026. While the RBA has flagged readiness to tighten if inflation proves stubborn, softer labor market conditions and limited price pressures across many goods and services should allow inflation to drift back into the 2–3% target range without the need to "tighten precipitously."

NZIER confidence hits 10-year high, RBNZ to hold until H2 hike

New Zealand business confidence surged in Q4, reinforcing signs that an economic recovery is starting to form. The New Zealand Institute of Economic Research (NZIER) said a net 39% of firms expect better general economic conditions in the months ahead, a sharp rise from 17% in the September quarter and the strongest reading since March 2014.

NZIER noted that while a gap remains between headline confidence and firms’ own domestic trading activity, the direction of travel is clearly improving. The survey suggests the impact of earlier interest-rate cuts is now filtering through the broader economy, lifting sentiment even as activity indicators lag.

Inflation signals was reassuring. Cost and pricing indicators point to broadly contained pressures in the December quarter, with cost pressures easing and a net 37% of firms reporting higher costs.

With demand recovering but inflation subdued, NZIER expects no further OCR cuts this cycle, forecasting the RBNZ’s Official Cash Rate to trough at 2.25% before hikes begin in the second half of 2026.

CHF/JPY breaks records as Yen rout meets Fed worries, targets 205 if momentum builds further

CHF/JPY surged to a fresh record high today, driven primarily by accelerating Yen weakness and, to a lesser extent, renewed support for the Swiss Franc. The cross has become a focal point for markets expressing both Japan-specific political risk and broader institutional unease centered on the US.

The Yen leg of the move was triggered by widespread reports that Japanese Prime Minister Sanae Takaichi intends to dissolve the House of Representatives at the outset of the regular Diet session on January 23, paving the way for a snap general election. The decision was reportedly conveyed to senior members of the ruling Liberal Democratic Party.

With Takaichi’s cabinet enjoying strong approval ratings nearly three months into her term, markets see the move as a calculated gamble to stabilize a fragile governing position. The ruling coalition currently holds only a razor-thin majority in the lower house, raising incentives to seek a fresh mandate while political momentum remains favorable.

If the lower house is dissolved on January 23, official campaigning could begin as early as January 27 or February 3, with voting widely expected on February 8 or February 15. An early election would allow Takaichi to push her agenda of expansionary fiscal spending.

Beyond domestic economics, a renewed mandate could also strengthen Takaichi’s hand on foreign policy. Her recent parliamentary remarks on Japan’s potential response to a Taiwan contingency have already contributed to deteriorating Japan–China relations, and an election win would give her greater backing to confront diplomatic challenges.

At the same time, the Swiss Franc has found support from safe-haven demand as confidence in the US Dollar softens. The Donald Trump administration’s threat of criminal indictment against Fed Chair Jerome Powell has raised concerns about the durability of US institutional credibility, diverting some defensive flows toward the Franc.

Technically, CHF/JPY’s uptrend resumed decisively this week with a break above 198.53. Near-term outlook remains bullish as long as 196.03 support holds, with the next target at the 138.2% projection of 173.06 to 186.02 from 183.95 at 201.86. A break higher in D MACD above its signal line would confirm strengthening momentum and open scope for further gains toward 161.8% projection at 204.91.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3409; (P) 1.3447; (R1) 1.3504; More...

GBP/USD is staying in range between 1.3389/3567 and intraday bias remains neutral. On the upside, break of 1.3567 will resume the rally from 1.3008 towards 1.3787 high. On the downside, break of 1.3389 will resume the fall from 1.3567. Sustained break of 55 D EMA (now at 1.3374) will argue that the decline is another falling leg in the corrective pattern from 1.3787. In this case, deeper fall should be seen back to 1.3008 support.

In the bigger picture, price actions from 1.3787 (2025 high) are seen as a correction to the larger up trend from 1.3051 (2022 low). Deeper decline could be seen as the pattern extends, but downside should be contained by 38.2% retracement of 1.0351 to 1.3787 at 1.2474 to bring rebound. Break of 1.3787 for up trend resumption is expected at a later stage.

Headline CPI inflation was 2.7% year-on-year (y/y) in December, in line with consensus expectations. That maintained the deceleration from the recent high of 3.0% in September.

Food prices were a little hot under the collar in December, up 0.7% month/month (m/m), and 3.1% versus a year ago as food inflation trended higher in 2025. In contrast, energy prices rose a more muted 0.3% m/m, as a drop in gasoline prices partially offset higher natural gas utility costs. Energy prices are up 2.3% y/y.

Beneath the surface, core inflation was slightly cooler than expected, up 2.6% y/y, unchanged from November's pace. That is a result of a 0.2% month/month (m/m) increase, one tenth lower than expected.

Within the core, goods prices were flat in December, breaking a streak of five reports of gains. The three-month annualized rate of change slowed to just 0.2%.

Price pressures on the services side were a little firmer (+0.3% m/m) as shelter costs accelerated (+0.4% m/m). Costs for lodging away from home rebounded (+2.9% m/m) after weakness through much of 2025. Recreation costs also surged ahead 1.2% m/m – a one-month record – as video services prices surged. Overall core services were up 3% y/y in December, unchanged from November.

Key Implications

Zooming out, inflation remained steady in December. It was encouraging to see core goods prices stand pat after a period of firming. Similarly, core services continued to cool on a trend basis.

Core inflation is tracking slightly cooler than our December forecast, but we still expect the knock-on effects from tariffs will push inflation higher over the coming months. This is likely to lead the Fed to push pause on its interest rate cuts for at least a couple of meetings. Eventually, we expect it to become clearer that the impact of tariffs on prices was a one-time shift, and a new Fed chair is likely to provide a more dovish tilt, leading to 2 additional quarter-point rate cuts mid-year.

US consumer inflation data for December delivered a largely reassuring signal. Headline CPI rose 0.3% mom, in line with expectations. Core CPI increased just 0.2%, undershooting forecasts for a 0.3% gain.

Shelter was the dominant driver of monthly inflation, rising 0.4% and accounting for the largest share of the overall increase. Food prices were also firm, with the food index climbing 0.7% on the month, matching gains in both food at home and food away from home. Energy prices edged up 0.3% in December, contributing modestly to headline pressures.

On an annual basis, CPI was unchanged at 2.7% yoy, matched expectations. CPI core unchanged at 2.6% yoy, below expectation of 2.7% yoy. Energy prices rose 2.3% yoy, while food inflation increased 3.1%.

Full US CPI release here.