On Wednesday, February 5, Japan’s wage growth and services sector data influenced the USD/JPY pair and Bank of Japan rate hike bets.
Average cash earnings surged by 4.8% year-on-year in December, up from 3.9% in November. Higher wages could raise disposable income, fueling consumer spending and demand-driven inflation. Rising inflation could support expectations of a second BoJ rate hike in H1 2025.
Japan’s Services PMI is also a crucial factor in driving USD/JPY trends. The Jibun Bank Services PMI rose from 50.9 in December to 53.0 in January, up from a preliminary 52.7. Significantly, input price inflation rose at the fastest pace since August, while firms increased staffing levels for the sixteenth consecutive month.
Upward trends in the employment and price sub-components signaled a more hawkish BoJ rate path, driving Japanese Yen demand.
Bank of Japan Governor Kazuo Ueda and Deputy Governor Himino recently hinted at another rate hike if the economy and prices align with projections.
Despite these trends, market participants remain uncertain about the BoJ rate path, highlighting the significance of the Summary of Opinions. Research service firm East Asia Econ stated:
“Japan – still not the right inflation. Ideally, the BOJ wants the participation rate to peak, higher wages to make consumers more positive, and both demand-pull and supply-push to drive inflation. Instead, consumption is sluggish as rising goods price inflation outpaces wages, with the part rate continuing to rise.”
Shifting to the US, the ADP’s jobs report and ISM Services PMI will influence Fed rate cut bets.
Economists predict the ADP will report a 150k increase in employment in January after rising 122k in December. Additionally, economists expect the ISM Services PMI to increase from 54.1 in December to 54.2 in January.
Better-than-expected numbers would support a more hawkish Fed rate path, signaling a USD/JPY move through the 156.884 resistance level. Conversely, weaker numbers and a more dovish Fed policy stance may drag the USD/JPY below 153.
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For the Australian dollar, the S&P Global Australian Services PMI spotlit the AUD/USD early in the February 5 session. Accounting for over 70% of Australia’s GDP, January’s PMI data could bolster the case for a February RBA rate cut.
The PMI rose from 50.8 in December to 51.2 in January, up from a preliminary 50.4.
Beyond the headline PMI, employment and price trends tested expectations of a more dovish RBA rate path. Firms increased staffing levels, with input price inflation accelerating, dampening bets on multiple H1 2025 RBA rate cuts.
Jingyi Pan, Economist Associate Director at S&P Global Market Intelligence, previously commented on price trends:
“Not only have rising prices dampened sales thus far according to anecdotal evidence, the potential to keep interest rates elevated for longer also poses a threat to the outlook for growth in 2025.”
For a comprehensive analysis of AUD/USD trends and trade data insights, visit our detailed reports here.
Turning to the US session, stronger services sector activity, labor market, and higher prices could impact the US-Aussie interest rate differential. Falling Fed rate cut bets would widen the gap in favor of the US dollar. A more hawkish Fed policy stance could drag the AUD/USD pair below $0.61500 toward the upper band of the descending channel.
Conversely, softer employment and price trends could narrow the interest rate differential, favoring the Aussie dollar. The AUD/USD could move toward $0.63 and the 50-day EMA on a more dovish Fed rate path.
Additionally, US-China tariff developments remain a risk factor. The Aussie dollar may face selling pressure if the US and China fail to reach a trade agreement.
Broader market trends suggest that central banks remain key drivers of currency markets:
Beyond central banks, global trade policies and China’s economic stimulus may impact market sentiment in the coming weeks.
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With over 28 years of experience in the financial industry, Bob has worked with various global rating agencies and multinational banks. Currently he is covering currencies, commodities, alternative asset classes and global equities, focusing mostly on European and Asian markets.