USD/JPY recovery remains limited below 148.00 with hopes of Fed cuts weighing

Hopes of a Dovish turn by the Fed are hurting the USD

Figures by the CME Fed Watch tool show that futures markets are now pricing more than 80% chances of a 25bps cut, from less than 40% before the data release, and an average of 63 bps rate cuts in the second half of the year.

Furthermore, the resignation of Fed Governour Adriana Kugler, a voter and a hawk, paves the path for US President Trump to nominate a candidate closer to his interests. Against this background, the US Dollar is struggling to take a significant distance from Friday’s lows.

In Japan, the BoJ conveyed a mixed message last week, reiterating its commitment to gradual monetary tightening but giving few details about the timing of the next rate hike, and showing comfort with the recent Yen weakness. Investors reacted by selling the JPY after the event.

The calendar is light today, with only the US Factory Orders data on schedule. The market consensus points to a weak reading, which might add to the evidence that tariffs are starting to pinch. Unless there is a positive surprise, this is not expected to be a particularly dollar-supportive release.

Employment FAQs

How do employment levels affect currencies?

Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.

Why is wage growth important?

The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.

How much do central banks care about employment?

The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.