USD/JPY strengthens as US yields rise and Dollar gains momentum

The Japanese Yen (JPY) weakens against the US Dollar (USD) on Tuesday, with USD/JPY reversing the previous day’s losses as the Greenback strengthens across the board, while US Treasury yields move higher. At the time of writing, the pair is trading around 156.70, up nearly 0.23% on the day.

Softer US Purchasing Managers Index (PMI) data released earlier in the session did little to dent the Dollar’s momentum. The US Dollar Index (DXY), which tracks the Greenback's value against a basket of currencies, is hovering around 98.53 after hitting a daily low of 98.16.

According to the latest S&P Global survey, the US Services PMI slipped to 52.5 in December from 54.1 in November and was revised lower from the preliminary estimate of 52.9. The Composite PMI also eased, falling to 52.7 from 54.2, reflecting slower expansion across both the manufacturing and services sectors.

Despite the near-term recovery in the Greenback, the broader US Dollar outlook remains fragile, with markets pricing in two Federal Reserve (Fed) rate cuts over the course of the year. However, policymakers remain divided over the pace and timing of further easing after last year’s cumulative 75-basis-point cut.

That said, the Fed is widely expected to keep interest rates unchanged at the January 27-28 meeting, with CME FedWatch showing about an 85% probability of a hold.

Traders are also closely monitoring developments between the United States and Venezuela following last weekend’s military strikes and the ousting of Venezuelan President Nicolás Maduro.

The escalation has kept geopolitical risk in focus, with any further signs of military action likely to fuel safe-haven demand for the US Dollar and support USD/JPY.

In contrast to the Fed, the Bank of Japan (BoJ) is widely expected to raise interest rates in the months ahead as it continues to move along a gradual path toward policy normalisation. BoJ Governor Kazuo Ueda reiterated the central bank’s hawkish bias on Monday, saying that policymakers will “keep raising rates in line with improvements in the economy and inflation.”

Moreover, persistent Yen weakness strengthens the case for further BoJ tightening, while also reviving concerns over possible intervention. Japanese officials have issued repeated verbal warnings in recent weeks, underlining their unease with sharp moves in the currency.

Looking ahead, Japan’s data docket remains light, with the Jibun Bank Services PMI due on Wednesday and Labour Cash Earnings figures on Thursday. In the United States, traders are bracing for a heavy slate of labour market data, with the focus on Friday’s Nonfarm Payrolls report, which could shape near-term expectations for the Fed’s monetary policy path.