The Yen strengthened midweek on global risk aversion but quickly lost momentum as sentiment stabilized. A selloff in US tech stocks and weak US labor data briefly lifted safe-haven demand, pulling USD/JPY to around 152.80, before rebounding as yields and equities recovered. The BoJ remains cautious, with no hike expected soon, while fiscal expansion under PM Takaichi supports continued monetary easing. Wage growth is improving, but weak consumption keeps inflation pressures muted.

JPY: Bearish

The Japanese Yen had a volatile week, moving mostly in response to global risk sentiment rather than domestic developments. USD/JPY climbed early in the week to a multi month high of 154.48 as broad US Dollar strength continued, but the trend reversed sharply from Tuesday as global markets turned risk off. A sell off in US tech and AI stocks triggered a flight to safety that made the Yen the top G10 performer. The move intensified after weak US labor data increased fears of a slowdown, pushing USD/JPY down to around 152.84. The Yen later eased slightly as risk appetite recovered before the weekend, but it still ended the week stronger, supported by its role as a safe haven during growing uncertainty about the US economy.

The Yen’s mid week rally was driven by a sharp deterioration in global risk sentiment. Concerns about overvalued US AI stocks, including Palantir and NVIDIA, led to a broad equity sell off that strengthened demand for safe assets. This risk aversion deepened later in the week after disappointing US labor indicators reinforced fears of weaker US growth. A modest rebound in equities on Friday reduced haven demand and caused the Yen to pare part of its gains.

Japanese officials maintained their warnings about excessive currency volatility. Top Currency Diplomat Mimura reiterated on Wednesday that recent Yen movements were deviating from fundamentals and that excessive volatility, rather than specific levels, was the main concern. These comments helped limit further Yen weakness early in the week and may have amplified its later recovery.

Domestic data had limited but notable effects. Wage growth accelerated, supported by reports that major labor unions plan to demand a 6% increase in next year’s spring negotiations, which could encourage the kind of demand driven inflation the Bank of Japan wants to see. However, household spending figures released Friday missed expectations, showing persistent weakness in consumption and supporting the BoJ’s cautious approach.

The Bank of Japan is still not expected to raise rates in December, with market pricing for a hike holding steady near 28%. Prime Minister Takaichi’s comments early in the week emphasized the importance of maintaining support for the economy and steady progress toward the inflation target, reinforcing the government’s preference for continued monetary easing.

The Japanese Yen staged a temporary rebound last week, rising on risk aversion after weak US data and a sharp equity sell off, but the move was largely external and short lived. Safe haven demand briefly pushed USD/JPY lower, yet domestic fundamentals and BoJ policy signals remain too soft to sustain a stronger trend. By the end of the week, the Yen had given back part of its gains as risk appetite steadied and yield differentials again favored the Dollar.

Near term, weak bearish. The Yen’s midweek strength was driven by a global risk off episode, not by any change in Japan’s policy outlook. The BoJ remains firmly cautious, with Ueda reiterating that policy will stay accommodative as consumption remains weak and inflation expectations stable. Wage growth has improved on paper, but household spending and core demand show little momentum, leaving the Bank comfortable maintaining ultra loose settings. Fiscal expansion under Prime Minister Takaichi reinforces that stance by reducing the need for policy normalization. With US yields likely to stabilize or rise if risk sentiment improves, the yield gap still works against the Yen. The recent risk off episode is unlikely to be a lasting market driver, as underlying sentiment remains broadly positive. Unless the BoJ signals readiness to tighten or global markets turn sharply defensive again, the currency will likely remain weaker.

Longer term, weak bullish. Japan’s current account surplus, steady corporate investment, and gradual wage progress still argue for eventual recovery once the Fed starts cutting and global yields converge lower. But for now, those structural supports are outweighed by policy divergence and weak domestic demand. The Yen will likely trade defensively through the next few months, strengthening only in bouts of global stress.

If the BoJ’s Summary of Opinions this week confirms that policymakers remain patient and PPI data stay soft, near term downside could extend. Conversely, if wage indicators or official rhetoric turn more hawkish or risk sentiment sours again, we would reconsider and lean toward a firmer Yen stance.

USD: Short at rally

The US Dollar experienced sharp swings during a volatile week as optimism over US economic strength quickly faded after several weak data releases. The DXY started the week strong, breaking above 100.00, supported by a solid ADP employment report and a stronger-than-expected ISM Services PMI, where the Prices Paid index surged to a three-year high, reinforcing expectations of a hawkish Federal Reserve. However, this momentum reversed sharply on Thursday after weak labor market proxies, including a surge in Challenger job cuts, led to renewed concerns about the economy. The sell-off accelerated Friday after a poor University of Michigan consumer sentiment report showed confidence plunging to 50.3, its lowest in years, due to the ongoing government shutdown, while inflation expectations climbed higher. This stagflationary combination sent the dollar to a weekly low near 99.40, erasing earlier gains and shifting sentiment from US strength to recession fears.

Mid-week data briefly supported the dollar as the ADP report showed a 42,000 job increase versus expectations of 28,000, a clear rebound from the previous month’s loss. The ISM Services PMI rose to 52.4, well above expectations, while the Prices Paid index jumped to 70.0, signaling persistent inflation pressures. However, Thursday’s reports painted a much weaker picture. Challenger Job Cuts surged 175.3% month-on-month to 153,000, RevelioLabs’ employment estimate showed a 9,100 job loss, and the Chicago Fed’s unemployment estimate climbed to 4.36%. Friday’s University of Michigan survey confirmed the downturn with sentiment dropping sharply and inflation expectations rising to 4.7%. Earlier in the week, the ISM Manufacturing PMI had also missed expectations at 48.7, but it was initially ignored as markets focused on the stronger services data.

Federal Reserve officials maintained a cautious tone as the government shutdown delayed key data releases. Goolsbee said the Fed should slow down its actions when visibility is poor, while Vice Chair Jefferson noted growing downside risks to employment. In contrast, Hammack argued that policy was barely restrictive and voiced concern about persistent inflation, particularly after the hot ISM Services Prices Paid data. Despite the volatility, market expectations for a December rate cut remained stable within a 16–17 basis point range. The dollar’s decline reflected fears of a broader slowdown rather than expectations for earlier cuts. The government shutdown remained unresolved, with a Democratic proposal to end it rejected late Friday, extending uncertainty.

Trade and geopolitical developments added further tension. The US and China clashed over AI chip sales after the White House blocked NVIDIA from selling modified chips to China, while Beijing ordered domestic AI chip use in state-funded projects. The Supreme Court also began reviewing the legality of tariffs imposed by the previous administration. Some minor signs of easing appeared, such as China’s purchase of US wheat and the suspension of certain rare earth export controls.

Market sentiment shifted dramatically through the week. Early optimism around US economic resilience gave way to fears of stagflation and recession. Weak labor data and the collapse in consumer confidence triggered a broad risk-off move, hitting both the dollar and equities. Additional pressure came from concerns over inflated valuations in AI stocks, especially after Palantir’s drop despite strong earnings and NVIDIA’s warning that China could outpace the US in AI development. The prolonged government shutdown further undermined sentiment and reinforced the perception of rising economic risk.

The Dollar held most of last week’s gains as the market stayed with the idea that the Fed’s cut was an insurance move and not the start of fast easing. Front end US yields stayed supported, rate differentials versus peers remained wider, and that kept the Dollar bid even while global risk sentiment stayed constructive. Inflation expectations moved higher, so the market is still willing to price some inflation risk even though parts of the realised data have been steadier.

Near term, neutral with a bearish tilt. The domestic driver is still the post Fed repricing toward a pause, but that is now largely in the price. That means upside needs a clear confirmation from CPI, retail sales or Fed communication, while downside only needs data to underwhelm. If CPI comes in softer or activity shows loss of momentum, markets can quickly rebuild December cut odds and shave off the recent policy premium, pushing the Dollar lower against the basket. External conditions are not providing a strong haven bid at the moment, so a small disappointment on US data has a better chance of showing up in the Dollar than an equivalent upside surprise. If inflation data match the rise in expectations and front end yields push up again, the neutral call can hold at current levels.

Longer term, weak bearish. The Fed is still closer to easing than several peers and the committee is already split which is typical for late cycle risk management. US growth is still respectable but the mix of softer housing, uneven business investment and fiscal noise points to slower momentum into year end. As the global backdrop steadies and other central banks close some of the rate gap, relative yield support for the Dollar should erode and the currency should underperform gradually. The Dollar will still find support on episodes of global stress or a sudden tightening in credit, so the path lower will not be straight.

If the narrative flips and the Fed is pushed by data or its own communication back toward a December cut, or if front end yields fall as markets rebuild a more aggressive easing path, we will reconsider and lean toward a weaker Dollar until the data and market pricing improve. A stronger global risk tone with better PMIs abroad and narrower US rate differentials would have the same effect.

USD/JPY 4H

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