USD/JPY extends advance as firmer US labour data lifts the Dollar ahead of Fed decision

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The Japanese Yen (JPY) weakens against the US Dollar (USD) on Tuesday, with USD/JPY extending gains for the third straight day as the Greenback strengthens following firmer labour market data. At the time of writing, the pair is trading near 156.90, its highest level since November 25.

The Yen weakens for a third straight day as the US Dollar strengthens on firmer labour market data.
Markets remain convinced the Fed will deliver a 25 bps cut on Wednesday, with traders also watching for any hawkish signals in the guidance.
The Yen struggles to gain traction despite rising expectations for a BoJ rate hike on December 19.

Fresh US labour data helped support the Dollar on Tuesday. The ADP Employment Change 4-week average improved to 4.75K from -13.5K, reinforcing the view that conditions may not be cooling as sharply as feared.

The data stand in contrast to last week’s ADP Employment Change, which unexpectedly showed a 32,000 decline for November after a revised 47,000 gain in October.

JOLTS Job Openings also exceeded expectations for both September and October. September registered 7.658 million openings against the 7.2 million forecast and 7.227 million in the previous month, while October printed 7.67 million compared with the 7.2 million consensus.

The data did little to sway expectations for Wednesday’s Federal Reserve (Fed) interest rate decision, with markets still convinced the central bank will deliver another 25 basis point (bps) cut.

However, the Dollar is also drawing support from expectations of a hawkish cut, with analysts suggesting the Fed could signal a long pause through 2026 as policymakers assess the impact of earlier reductions while inflation remains above target and the labour market shows no signs of severe deterioration.

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, is trading around 99.27, extending gains after Monday’s modest recovery.

On the Japanese side, the Yen continues to struggle for traction even as expectations grow that the Bank of Japan (BoJ) will raise rates at its December 19 meeting, potentially lifting the policy rate to around 0.75%.

BoJ Governor Kazuo Ueda said earlier on Tuesday that the recent rise in long-term Japanese Government Bond yields has been “somewhat rapid,” adding that the central bank stands ready to step into the bond market if volatility persists. Ueda also noted that underlying inflation appears to be converging toward the BoJ’s target.

At the same time, fiscal authorities remain alert to sharp currency movements. Prime Minister Sanae Takaichi reiterated earlier in the day that Tokyo will take “appropriate action” if the Yen weakens too rapidly.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.