USDJPY erases all of the early gains

The USDJPY pair rose as much as 2% early in the session after the Bank of Japan did not change its monetary policy, even though 10-year bond yields exceeded the target. Today, however, we are witnessing a powerful blow to the dollar that was sparked by the release of 3 important macroeconomic figures:

• PPI inflation falls to 6.2% y/y and is lower than CPI inflation

• Retail sales dropped by 1.1% m/m for December and this is another month of decline (the last two months of the year are usually strong in terms of retail sales)

• Industrial production fell to -0.7% m/m, which is the third month of declines in a row (is is worth remembering that the US ISM Manufacturing PMI fell to 48.4 in December, pointing to the 2nd month of contraction in factory activity)

This picture shows that the economy has actually cooled down, with only the labor market remaining strong, especially in the service sector. Nevertheless, one needs to remember that a possible strong slowdown or even a recession may bring huge layoffs in the service sector, as it was in the initial phase of the pandemic. Weak data may be an important factor for the Fed when making its next monetary policy decision in February. If the Fed announces its readiness to end rate hikes sooner or will refrain from further balance sheet reduction, it would be great news for equities and negative for the US dollar.