Forex News

• GBP/JPY extends gains as broad-based Yen weakness persists amid rising political uncertainty in Japan.
• Snap election speculation fuels fiscal concerns, pushing JGB yields to fresh 27-year highs.
• Markets look ahead to Japan’s PPI and key UK economic releases later this week.

The British Pound (GBP) pushes higher against the Japanese Yen (JPY) on Tuesday, supported by broad-based Yen weakness as political developments in Japan weigh on sentiment. At the time of writing, GBP/JPY is trading around 213.82, up about 0.40% on the day, holding close to levels last seen in July 2008.

The Yen’s underperformance follows reports that Prime Minister Sanae Takaichi is considering dissolving the lower house and calling a snap general election as early as February. The prospect of an early vote has lifted expectations of looser fiscal policy and increased political spending, as investors grow wary of Japan’s already large debt load.

Expectations of increased stimulus and heavier debt issuance have rippled through Japan’s bond market, with the 10-year Japanese Government Bond (JGB) yield climbing to around 2.166%, its highest level in 27 years.

This development is also complicating the Bank of Japan’s (BoJ) monetary policy outlook. Elevated political uncertainty and rising fiscal risks could delay the timing of the next rate increase, as the central bank proceeds cautiously with policy normalisation.

In FX markets, the reaction has been a renewed wave of Yen selling, with USD/JPY near one-and-a-half-year highs and the Yen falling to fresh all-time lows against both the Euro (EUR) and the Swiss Franc (CHF). The renewed bout of broad-based weakness has revived talk of potential intervention, as authorities in Tokyo continue to warn against excessive and one-sided FX moves.

The Japanese economic docket is relatively light this week, keeping the focus on political risk and FX flows. Attention will turn to Thursday’s Producer Price Index (PPI) release.

In the United Kingdom (UK), Retail Sales growth slowed at the end of last year. Data released by the British Retail Consortium showed that Retail Sales rose 1.0% YoY on a like-for-like basis in December 2025, marking the weakest pace in seven months. The reading came in above market expectations for a 0.6% increase but eased from the previous month’s 1.2% rise.

Looking ahead, attention will turn to a heavy slate of UK economic releases on Thursday, with monthly Gross Domestic Product (GDP) figures taking centre stage.

• EUR/USD consolidates around 1.1650 on Tuesday after rejection at the 1.1700 area the previous day.
• Hawkish comments by Fed's Williams provided some support to the US Dollar on Monday.
• The market is bracing for a strong US CPI reading later on Tuesday.

EUR/USD is trading at 1.1660 at the time of writing, after moving back and forth between 1.1650 and 1.1675 during the Asian ans European Markets on Monday. The pair eased from weekly highs near 1.1700 on Monday after New York Federal Reserve’s (Fed) President John Williams conveyed an optimistic view on the US economic outlook, and curbed expectations of any immediate rate cut.

Previously, investors had sold the US Dollar across the board, as a report by the New York Times affirming that the US Government was initiating a criminal investigation against the Fed Chairman, Jerome Powell, boosted concerns about the independence of the US central bank.

The US government's action is the last episode of a long-lasting conflict between US President Donald Trump and Jerome Powell, which raises questions about the central bank’s ability to set its monetary policy based solely on its dual mandate of maximum employment and stable prices. The Presidents of the world's major central banks issued an unprecedented statement on Tuesday in solidarity with Chairman Powell.

Macroeconomic data is expected to return to the focus on Tuesday, as the US Bureau of Labour Statistics (BLS) releases the December US Consumer Price Index (CPI) report. Price pressures are expected to have remained well above the Fed’s 2% target, with core inflation ticking up. Barring surprises, these figures are likely to endorse the positions of the Fed's hawkish party.

Daily Digest Market Movers: Concerns about Fed's independence keep weighing on the US Dollar

• The Euro (EUR) has lost ground but remains above Friday's lows, with the US Dollar still vulnerable amid the US Government's attacks on the Fed's independence.
• Fitc Ratings warned on Monday that the Fed's independence is a key factor supporting the US AA++ sovereign rating and that they will continue monitoring the governance, including "checks and balances," in their assessment of the US ratings.
• S&P Global Ratings also said that Fed credibility is a key pillar of US sovereign creditworthiness. In a previous report, the rating agency also warned that the US rating would come under pressure if the strength of American institutions is undermined.
• The heads of the European Central Bank (ECB), the Bank of England (BoE) the Bank of Canada (BoC), and eight further central banks have raised their voices in solidarity with Chairman Powell, defending the independence of the central banks as a cornerstone for price, financial, and economic stabilit, in the interest of the citizens that they serve.
• On Monday, New York Fed President Johnsn Williams provided some support for the US Dollar, stating that recent Fed decisions have moved “the modestly restrictive stance closer to neutral” and that he expects a healthy economy in 2026. Williams also said that he sees monetary policy well-positioned to support the stabilisation of the labour market, and that he sees no reason to cut interest rates anytime soon.
• The market is pricing a 95% chance that the Fed will keep interest rates unchanged at its January meeting, and hopes of a rate cut in March have dropped to 24% from 41% one week ago, according to data released by the CME Group's Fedwatch tool.
• The release of the US CPI report, due later on Tuesday, might shed some more light on the Fed's monetary policy path. Headline inflation is seen growing steadily at a 2.7% yearly pace, while core inflation, the most relevant from the monetary policy perspective, is seen ticking up to 2.7% YoY, from 2.6% in November.

Technical Analysis: EUR/USD holds within the descending channel

The EUR/USD pair keeps the broader bearish trend from late December highs intact. The pair failed to breach resistance at 1.1700 and returned to the mid-range of the 1.1600s.

Technical indicators are mixed on the 4-hour chart. The Moving Average Convergence Divergence (MACD) line remains above the signal line, but the histogram bars are contracting, which highlights a waning upside momentum. The Relative Strength Index (RSI) has pulled back below 50, showing a neutral-to-bearish stance.

The intraday low, at 1.1653, is likely to provide some support, ahead of Friday's low of 1.1618 and the channel's bottom, now at the 1.1600 area. To the upside, trendline resistance is now at 1.1694, a few pips below Monday's high. A confirmation above this level clears the path towards the January 6 high, at the 1.1740 area.

(The technical analysis of this story was written with the help of an AI tool.)

• The US Consumer Price Index is seen rising 2.7% YoY in December.
• Core CPI inflation should remain sticky well above the Fed’s goal.
• Investors have so far pencilled in 50 bps of easing this year.

The US Bureau of Labor Statistics (BLS) will publish December’s Consumer Price Index (CPI) report on Tuesday at 13:30 GMT. The report is expected to show that prices remained broadly stable in the last month of 2025. As always, it’s a key read on inflation and could stir some short-term moves in the US Dollar (USD).

That said, it’s unlikely to shift the bigger picture for the Federal Reserve (Fed) just yet. With policymakers still focused primarily on the health of the domestic labour market, the data would probably need to deliver a real surprise to trigger any rethink on monetary policy.

What to expect in the next CPI data report?

Inflation itself isn’t expected to spring many surprises. Headline CPI is seen rising 2.7% YoY in December, unchanged from the previous month. Strip out the more volatile food and energy components, and the picture is much the same: core inflation is forecast to edge up slightly to 2.7% from 2.6%, still uncomfortably above the Fed’s target.

On a monthly basis, both headline and core CPI are expected to come in at a fairly steady 0.3%, reinforcing the idea of inflation that’s easing only slowly rather than rolling over.

That also helps explain why December’s rate cut was never a slam dunk. The Minutes released on December 30 show a deeply split Committee, with several officials saying the call was finely balanced and that leaving rates unchanged was a very real alternative.

Previewing the report, analysts at TD Securities noted, “Following the impact from the government shutdown, we now anticipate the core segment to peak at 3% in Q2. We remain of the view that gradual disinflation will be the story in H2 2026. We expect core CPI inflation to end the year at 2.6%.”

How could the US Consumer Price Index report affect EUR/USD?

Investors are still chewing over a mixed set of signals from December’s Nonfarm Payrolls (NFP), but that debate is starting to take a back seat. Fresh threats to the Fed’s independence have resurfaced, and they risk overshadowing the significance of Tuesday’s inflation data altogether.

Given that the Fed is still keeping a close eye on the labour market, December’s CPI numbers are unlikely to change the policy picture in any meaningful way, unless inflation throws up a genuine surprise, one way or the other.

Turning to EUR/USD, Pablo Piovano, Senior Analyst at FXStreet, shared his technical outlook. “If EUR/USD decisively slips below the short-term 55-day moving average at 1.1639, it would open the door to a deeper pullback, with the 200-day SMA at 1.1561 coming into focus sooner rather than later,” he notes. “Below that, attention would turn to the November low at 1.1468 (November 5), followed by the August trough at 1.1391 (August 1).”

“On the flip side, a clean break above the December peak at 1.1807 (December 24) would shift the tone back to the upside. That would put the 2025 high at 1.1918 (September 17) on the radar, with the psychologically important 1.2000 level lurking just beyond,” Piovano adds.

• AUD/USD trims gains and dips to 0.6700 after rejection at a reverse trendline around 0.6725.
• The lower high and bearish divergence in the 4-hour RSI point to a trend reversal.
• Price action is completing the right shoulder of a potential H&S pattern.

The Australian Dollar remains trading within previous ranges against its US counterpart, as the pair’s recovery from the 0.6660 area was capped at 0.6725 on Monday before pulling back to 0.6700. The  Greenback is trading moderately higher on Tuesday, as investors brace for the US inflation report due later today.

U.S. consumer prices are expected to have grown at a steady 2.7% year-on-year pace in December. Core inflation, however, is forecasted to have accelerated to 2.7% from 2.6% in November. Barring a surprise, these figures are likely to strengthen the case for a steady Federal Reserve (Fed) policy in the coming months and provide support to the USD.

Technical Analysis: Key support, at 0.6560, remains in play

In the 4-hour chart, AUD/USD trades at 0.6703, with technical indicators showing a fading bullish momentum. The Relative Strength Index (RSI) sits at 49 and highlights a bearish divergence with recent price action. The Moving Average Convergence Divergence (MACD) hovers around the zero line with a slight positive tilt, reinforcing a neutral tone.

Monday's rejection at the reverse trendline, near 0.6725, adds to the case of a potential bearish Head & Shoulder's pattern, a common figure to anticipate trend reversals. This figure would be confirmed on the breach of the neckline, at 0.6660 (December 31, January 5 low), adding pressure towards the December 18 low, at 0.6595.

On the upside, bulls should break above the confluence of Monday's high and the reverse trendline, in the area of 0.6730 now, to resume the broader bullish trend and shift the focus towards the three-month high, 0.6770, hit last week.

(The technical analysis of this story was written with the help of an AI tool.)

The Japanese Yen (JPY) fell 0.5% to 158.91 per US Dollar (USD), hitting its weakest level since July 2024, as speculation of a snap election under PM Takaichi triggered renewed selling, ING's FX analyst Francesco Pesole notes.

US-Japan yield gap and outflows pressure yen

"The yen fell 0.5% to 158.91 per dollar, its weakest since July 2024, as speculation that Japanese PM Sanae Takaichi may call a snap election triggered renewed selling. The move surpassed January’s low of 158.87 and intensified concerns over potential intervention, with Japanese officials warning against excessive and speculative FX moves."

"Persistent US-Japan yield gaps, negative real rates, and capital outflows continue to weigh on the currency, with a potential slide above 160 USD/JPY. Intervention risk remains in focus after past actions when volatility spiked."

JPY and JGB slide, while the Nikkei rallies as Japan election talks fuel bets of more government stimulus. According to Kyodo News, Japanese Prime Minister Sanae Takaichi plans to announce a dissolution of the lower house of the legislature on January 23, paving the way for a snap election in February, BBH FX analysts report.

BOJ intervention risk rises with USD/JPY near 160

"Takaichi does not need to call a general election until October 2028, but she may want to capitalize on her high approval rating (of nearly 70%) to regain her party’s (LDP) majority in the lower house. That has raised concern over a further loosening of Japan’s fiscal discipline as reflected by the underperformance in JPY and JGBs."

"Worries over Japan fiscal profligacy are overdone. Japan nominal GDP growth is running at around 4% and leading indicators point to an encouraging growth outlook, while 10-year government bond yields are closer to 2%. With growth comfortably exceeding borrowing costs, Japan can sustain primary budget deficits without putting its debt ratio on an upward trajectory. In this environment, fiscal sustainability is far less fragile than markets currently imply."

"In the meantime, the risk of BOJ intervention to curtail JPY weakness is rising with USD/JPY closing-in on 160.00. Japanese Finance Minister Satsuki Katayama reiterated her 'concerns about the one-way weakening of the yen', adding that 'Treasury Secretary Bessent shares those concerns'. The chair of Japan’s biggest business lobby Keidanren also chimed in cautioning that the current yen weakness is a bit excessive and a correction for stronger yen is needed. In its last two FX interventions, the BOJ bought ¥9.79 trillion from April 26, 2024 through May 29, 2024 after USD/JPY rallied by 5.7% in 20 days to a high of 160.17. And, the BOJ bought ¥5.53 trillion from June 27, 2024 through July 29, 2024 after USD/JPY rallied by 4.2% in 30 days to a high of 161.95."

Markets have started to rethink some of their USD-bearish Fed independence bets, following several pushbacks against the Department of Justice's probe into Jerome Powell from Republican lawmakers. Senator Thom Tillis went as far as saying he’ll oppose the next Chair nominee until the matter is resolved, while Treasury Secretary Scott Bessent reportedly flagged the financial market implications of the investigation to Trump, ING's FX analyst Francesco Pesole notes.

Republican pushback eases political pressure on Powell

"Investors will keep seeking reassurance – ideally from Trump or the DoJ – but the risks of another rapid drop have abated. If the investigation is dropped, there’s a decent chance the dollar may come out stronger from this story. That’s because markets might then perceive Powell as more legitimized (if nothing else to prove a point) in adopting a hawkish stance."

"Anyway, nerves appear calmer enough today to re-focus on data. We think the dollar faces some upside risks from what we anticipate will be a hotter-than-expected 0.4% MoM December core CPI print (consensus 0.3%). Because of the shutdown, more data collection occurred later in November 2025, a period when Thanksgiving-related discounting is common. Compared with the full month of November 2024, this timing likely skewed that inflation reading lower. Reverting to more standard collection timings in December means risks of a hotter read."

"A chunk of hawkish repricing already occurred last Friday after the jobs data, and markets increased implied cut probability on the back of the Fed investigation story. This means the upside for the dollar is not huge, but could allow USD crosses to keep edging back towards last Friday’s close."

US Dollar (USD) has stabilized following yesterday’s dip triggered by heightened political threat to the Fed’s independence. Even if checks remain – Republican resistance in the Senate and a non-autocratic FOMC – the politicization of the Fed weakens its inflation-fighting credibility which is a structural drag on USD. In the near-term, the recent upward adjustment to US rate expectations following a run of Goldilocks-type US economic data offers USD support, BBH FX analysts report.

Fed signals policy on hold amid moderating inflation

"Influential New York Fed President John Williams echoed the Fed’s on-hold guidance. Williams stressed that 'Monetary policy is now well-positioned to support the stabilization of the labor market and the return of inflation to the FOMC’s longer-run goal of 2%'. Williams’ base case for 2026 is above-trend GDP growth between 2.5%-2.75%, inflation to peak at around 2.75-3.0% 'sometime during the first half of this year, before starting to fall back', and the unemployment rate to stabilize."

"Fed funds futures price little chance of a cut at the next three FOMC meetings (January 28, March 18, and April 29). The next full 25bps cut isn’t priced until the June 17 meeting. Non-FOMC voters St. Louis Fed President Alberto Musalem and Richmond Fed President Tom Barkin speak today. US December CPI is the focus. Headline inflation is expected at 2.7% y/y for a second consecutive month, and core inflation is seen rising 0.1pts to 2.7% y/y. The Cleveland Fed’s Nowcast model forecasts both headline and core CPI at 2.6% y/y in December."

"More importantly, upside risks to prices are fading and leaves scope for the Fed to ease policy. The ISM prices paid indexes point to moderating inflation pressures. Additionally, average hourly earnings growth (3.8% y/y) is running around sustainable rates consistent with the Fed’s 2% inflation goal given annual nonfarm productivity growth of around 2%."