The U.S. dollar remained under pressure on Tuesday as investors positioned ahead of a busy slate of economic data expected to influence the outlook for interest rates. Meanwhile, the Japanese yen held on to recent gains following Prime Minister Sanae Takaichi’s decisive election victory.
In early Asian trading, sterling was little changed after a volatile previous session. The pound stabilized as markets assessed the political challenges facing UK Prime Minister Keir Starmer, alongside growing expectations of additional interest rate cuts. Sterling was last seen at $1.3682, after rising 0.6% in the prior session.
The Japanese yen traded at 155.85 per dollar, maintaining its overnight strength after gaining 0.8%. Verbal intervention warnings from Japanese authorities on Monday helped support the currency, following an initial bout of weakness after Takaichi’s election win.
Despite the near-term rebound, analysts remain cautious on the yen’s longer-term outlook. Attention is expected to shift toward Takaichi’s fiscal agenda, with the currency down roughly 6% since she assumed leadership of the LDP in October.
Carol Kong, a currency strategist at Commonwealth Bank of Australia, said that looser fiscal policy under a more assertive Takaichi administration could ultimately weigh on the yen. She added that the bank expects dollar-yen to strengthen again, forecasting a move toward 164 by year-end.
While the yen has clawed back some recent losses against select currencies, it resumed weakening on Tuesday against the Swiss franc and the euro. Analysts at OCBC said markets would need clearer assurances that fiscal policy will remain restrained for a more sustained yen rally.
They also noted that a firmer and more hawkish stance from the Bank of Japan may be required to anchor expectations and drive a more durable decline in USD/JPY.
The euro edged lower to $1.19 after jumping 0.85% on Monday. The dollar index, which tracks the greenback against six major currencies, hovered near a one-week low at 96.952. Analysts pointed to reports that China has encouraged local banks to reduce exposure to U.S. Treasuries, adding to pressure on the dollar.
Heavy U.S. data calendar in focus
Markets are now turning their attention to a data-heavy week in the United States, with key employment and inflation reports expected to provide fresh insight into the health of the economy. The releases were slightly delayed due to a recently concluded three-day government shutdown.
White House economic adviser Kevin Hassett said on Monday that job growth could slow in the coming months, citing weaker labor force expansion and higher productivity. Investors are watching closely to determine whether recent softness in the labor market has begun to stabilize.
Kong added that markets will be closely focused on upcoming U.S. payrolls and consumer price index data, noting that the bank expects payroll growth to come in below consensus. January’s nonfarm payrolls report, due Wednesday, is forecast to show an increase of about 70,000 jobs.
Traders continue to price in two interest rate cuts from the Federal Reserve this year, with the first expected in June. However, uncertainty remains high following the nomination of Kevin Warsh to replace Jerome Powell as Fed chair.
Elsewhere in currency markets, the Australian dollar slipped 0.2% to $0.7079, while the New Zealand dollar also eased 0.2% to $0.6045.
