The dollar rally shows no signs of stopping, and the three main reasons behind the yen falling below 158【This Week's Forex Observation】

ser_we_are_early · 2026-01-15T13:07:53+00:00

Last week, the US dollar index rose, and non-US currencies generally weakened, mainly due to the US economy performing better than expected and rising geopolitical risks. The euro and yen depreciated by 0.73% and 0.65%, respectively. This week, the market is focused on US CPI data, which will influence the trend of the US dollar and the potential rebound of non-US currencies. Political changes in Japan will also be an important factor affecting the yen's movement.

ser_we_are_early

2026-01-15 13:07:53

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Last Week’s Market Review: Non-USD Currencies Weaken Collectively

Last week, the US Dollar Index rose by 0.72%, while non-USD currencies generally came under pressure. The euro declined by 0.73%, the Japanese yen depreciated by 0.65%, the British pound fell by 0.41%, and the Australian dollar experienced a mild decline of only 0.06%. Behind this decline is the dual influence of the resilience of the US economy and geopolitical risks.

1. US Economy Outperforming Expectations, Fed Rate Cut Expectations Further Delayed

Non-Farm Payrolls Data Masking Labor Market Resilience

In December, non-farm employment increased by 50,000 jobs, falling short of strong expectations, but the unemployment rate unexpectedly dropped to 4.4%, indicating that the US labor market remains resilient. Based on this, the market has largely ruled out a rate cut by the Federal Reserve in January, with the first cut now expected in June.

EUR/USD responded with a drop of 0.73%, with the dollar maintaining strength supported by employment data.

Rising Geopolitical Tensions Applying Downward Pressure

Escalating geopolitical uncertainties further dampen the euro outlook. The US took military action against Venezuela and detained its leader, and Trump has reportedly considered military strikes against Iran. Such events push energy prices higher, providing clear bearish signals for the euro.

Key Focus This Week: US December CPI Data Release

The December CPI published on January 13 will be a decisive signal. The market expects the year-over-year CPI to remain at 2.7%, with core CPI forecasted to rise from 2.6% to 2.7%.

If CPI exceeds expectations, the dollar will likely strengthen further, and EUR/USD faces downside risks. Conversely, below-forecast data will reinforce the Fed’s rate cut bets, benefiting the euro rebound.

Technical Outlook

EUR/USD has rebounded back above the 100-day moving average. If it can hold this support, the next targets are the 21-day moving average at 1.173 and the previous high at 1.181. However, if it falls below the 100-day moving average again, support levels will test the previous low at 1.149.

2. Yen Depreciates to 158 Level, Political Changes Become Key Variables

Behind the Break of 158 in USD/JPY

Last week, USD/JPY rose by 0.65%, breaking through the 158 level. Factors driving this include the continued strength of the dollar and political developments in Japan.

On January 9, news emerged that Japanese Prime Minister Sanae Takaichi plans to dissolve the House of Representatives on January 23, with a general election to be held in mid to late February. Takaichi is known for advocating proactive fiscal policies, and the unprecedented scale of fiscal stimulus plans poses potential bearish risks for the yen. Markets worry this could delay the Bank of Japan’s rate hike timetable.

Institutional Forecasts: 158 Is Just the Starting Point

MUFG Morgan Stanley Securities expects USD/JPY to rise to 160 by 2026. The Fukuoka Financial Group’s forecast is even more aggressive, expecting USD/JPY to reach 165 as the dollar continues to strengthen.

Risks That Cannot Be Ignored

Despite the bullish outlook, risks of Japanese government intervention remain. Additionally, Trump could nominate the next Fed Chair as early as January, and policy shifts could disrupt the dollar’s upward trajectory. Downside risks for USD/JPY should still be watched.

This Week’s Focus

Closely monitor Japanese political developments and US economic data. If Fed rate cut expectations strengthen or the Bank of Japan’s rate hike expectations weaken, USD/JPY may retrace. Conversely, the trend could continue upward.

Technical Analysis

After breaking below 158, USD/JPY has pulled back. Whether it can hold this key level this week will determine the next move. Successfully holding 158 targets the next level at 160. Continued pressure below 158 increases downside risk, with support levels at the 21-day moving average at 156.3 and the previous low at 154.3.

Trading Tips for This Week

Pay attention to US CPI data, Japanese political developments, and Fed Chair nomination news. Geopolitical situations also require ongoing monitoring, as any new developments could trigger market re-pricing.

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