The dollar began to move cautiously on Monday, in what is shaping up to be a critical week for the prospect of a U.S. rate cut, while the yen's recent rebound has been supported by bets on a rate hike in the country.
Over the weekend, Bank of Japan Governor Kazuo Ueda said the next interest rate hikes were “close as economic data is on track”, following the figures showing that inflation in Tokyo increased in October.
Markets now estimate a 56% probability that the Bank of Japan will raise its rates by a quarter of a point to 0.5% at its general policy meeting on December 18 and 19.
Christian Keller, an economist at Barclays, said labor income data this week was expected to show a further recovery and all signs pointed to another “shunto” wage cycle in February.
“The wage and inflation picture continues to support further rate hikes, although whether the BOJ will act in December or January remains tricky,” he added.
The risk of an anticipated rise was enough to keep the dollar at 149.60 yen, after losing 3.3% last week, its worst performance since July. Support lies around 149.40/47 and 147.35.
The euro held steady at $1.0555, after rebounding 1.5% last week and moving away from a one-year low of $1.0425. The dollar index remained stable at 105.790, after finishing November with a 1.8% gain, even after last week's decline.
“Given the continued resilience of the U.S. economy and the deteriorating outlook elsewhere, we do not believe this is the start of a larger pullback for the dollar,” said Jonas Goltermann, an economist in deputy head for markets at Capital Economics.
“But the bar for a further change in expected interest rates in favor of the United States in the short term is quite high,” he added. “A period of consolidation until the end of the year seems to us to be the most likely scenario, although risks remain in favor of the dollar during 2025.”
The November jobs report, due Friday, will be decisive for rates. Median forecasts are for an increase of 195,000 after October's weather and strike report, which could also be revised due to a low response rate to that survey.
The unemployment rate is expected to increase from 4.1% to 4.2%, which should allow the Federal Reserve to continue cutting rates by 25 basis points on December 18.
Markets estimate a 65% chance of such an easing, although they only forecast two additional cuts for the whole of 2025.
Many Fed officials are scheduled to speak this week, including Fed Chair Jerome Powell on Wednesday, while other data includes surveys of manufacturing and services.
The European Central Bank is also expected to cut rates this month, with markets estimating there is a 27% chance it will cut rates by even 50 basis points on December 12.
Political uncertainty is another drag on the single currency as investors wait to see if the French government can survive the week intact.
Leaders of the far-right National Rally party said on Sunday that the government had rejected their demands for additional budgetary concessions, increasing the chances of a vote of no confidence in the coming days that could oust Prime Minister Michel Barnier.
The threat of an ever-widening budget deficit has caused French yields to match those of Greece, while the gap with German yields has reached its highest level since 2012.
