A look at the day ahead in European and global markets from Tom Westbrook

A rate hike in Japan added momentum to a tide of dollar selling in the Asia session, as the first week of Donald Trump’s presidency has turned out to be less aggressive on the trade policy front than many in the markets had expected.

The dollar is down about 1.7% on the euro this week and a touch further on sterling. The dollar index is down 1.5%.

Tariffs are seen as positive for the dollar because the U.S. is a big importer and, in theory, if exporting countries can’t find alternative customers, they may weaken their currencies to offset the trade levy and preserve market share.

Tariffs do sound as though they are coming, but the rough conclusion from a few days of Trump’s second term seems to be that they will be subject to negotiation.

In a Fox News interview, Trump said he would rather not use tariffs against China and that a phone call with Chinese President Xi Jinping last week was friendly.

Trump had earlier told the World Economic Forum in Davos, via video link from Washington, that he wanted the U.S.-China trade relationship to be “fair”.

“We don’t have to make it phenomenal,” he said.

Hong Kong’s Hang Seng was up 1.8% through the morning session. China’s yuan hit a six-week high against the dollar.[.HK][CNY/]

The China-sensitive Australian dollar hit a five-week peak, and MSCI’s index of Asian emerging market currencies was heading for its largest one-week percentage gain in 18 months. [AUD/][EMRG/FRX]

The Bank of Japan lifted short-term interest rates to 0.5%, their highest in 17 years. Although the move was expected, traders pushed the yen about 0.6% higher to 155.12 per dollar.

The focus now moves over to a news conference by BOJ Governor Kazuo Ueda at 0630 GMT. British and European PMI figures are due later in the session, with services seen outpacing manufacturing.

Futures indicate a broadly steady open for Wall Street, putting the S&P 500 – which notched a record closing high on Thursday – on course for a weekly gain. [.N]

Key developments that could influence markets on Friday:

– British and European PMIs

(By Tom Westbrook; Editing by Edmund Klamann)

Investing.com– The Bank of Japan raised interest rates by 25 basis points, as expected, with the central bank forecasting that inflation will remain underpinned and around its annual target in the coming years. 

The BOJ slightly trimmed its gross domestic product forecasts for fiscal 2024 and 2025, while raising its forecasts for inflation. 

The BOJ raised its benchmark overnight interest rate by 25 basis points to around 0.5%, in line with analyst expectations. The hike is the central bank’s third raise since it began scaling back its ultra-loose monetary policy in early-2024. 

The BOJ signaled that if its economic forecasts were met in the coming months, it will hike interest rates further.

“Given that real interest rates are at significantly low levels, if the outlook for economic activity and prices presented in the January Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation,” the BOJ said in a statement. 

Friday’s hike comes just hours after consumer price index data showed Japanese inflation rose further in December and remained above the BOJ’s 2% annual target. 

The BOJ said policymakers expect CPI to average around 2.6% to 2.8% in fiscal 2024, slightly above prior expectations of 2.4% to 2.5%. Their CPI outlook for 2025 is at 2.2% to 2.6%, much higher than prior forecasts of 1.7% to 2.1%.

On the growth front, gross domestic product is expected around 0.4% to 0.6% in fiscal 2024, down slightly from prior forecasts, while GDP for 2025 is expected around 0.9% to 1.1%. 

The BOJ’s tightening cycle was sparked largely by expectations of a virtuous cycle of higher wages and increasing private consumption, with recent data showing both trends remained squarely in play.

The central bank recently signaled that it expects 2025 springtime wage negotiations to once again yield a bumper hike in wages, giving it more headroom to keep raising interest rates.

But analysts only expect the BOJ to next raise rates by July, after the conclusion of Japan’s upper house elections offers more political clarity. 

Policymakers are also on edge over U.S. President Donald Trump’s plans for increased trade tariffs, which could impact Japanese exporters while also denting the yen. 

By Kevin Buckland

TOKYO (Reuters) – The yen strengthened and Japanese government bond yields rose to fresh multi-year highs on Friday after the Bank of Japan hiked interest rates as expected and raised its inflation forecasts.

Japan’s Nikkei share average pared earlier gains to up 0.26% at 40,062.48 as of 0405 GMT, after ending the morning session up 0.6%.

The yen was about 0.5% stronger at 155.32 per dollar, after initially swinging between small gains and losses immediately after the decision, which came close to the end of the stock market’s midday recess.

The two-year JGB yield ticked up an additional half a basis point (bp) after the policy announcement to be 1 bp higher at 0.705% on the day, a level last seen in October 2008. The five-year yield climbed 2 bps to 0.895%, the highest since December 2008.

The BOJ hiked short-term lending rates by a quarter point to 0.5%, which had been already priced into money markets after central bank officials, including Governor Kazuo Ueda, had clearly signalled earlier this month that policy tightening was on the table.

In its quarterly outlook report, the board raised its forecast for core consumer inflation to hit 2.4% in fiscal 2025 before slowing to 2.0% in 2026. In the previous projection made in October, it expected inflation to hit 1.9% in both fiscal 2025 and 2026.

Investor focus now falls on Ueda’s news conference, scheduled for 0630 GMT, for clues on the pace of further tightening. The market is currently priced for one further quarter-point increase by year-end.

“I expect the rate will be kept the same for at least the next six months,” keeping the pace broadly the same with hikes so far this cycle, said Kota Suzuki, a strategist at Nomura Asset Management.

“The central bank will be a little more cautious from now on as it will carefully assess the economic situation and the impact of the interest rate hike.”

Early gains in Japanese stocks came on the back of a 0.5% rise in the U.S. S&P 500 (SPX) overnight to mark its first closing record since Dec. 6.

The yen was supported by comments from U.S. President Donald Trump that he thought he could reach a trade deal with China and avoid additional tariffs.

TOKYO (Reuters) – Japanese annual pay increases this year must exceed the 5.1% secured last year because real wages continue to fall, the head of the Rengo trade union group told Reuters on Friday.

Rengo is formally seeking wage hikes of at least 5% in this year’s “shunto” wage negotiations. President Tomoko Yoshino said the impact of rising prices meant the group was focused on securing a result that outstripped last year’s, which was the biggest increase in 33 years.

“Even after last year’s wage hikes I think there are few people who feel their real living conditions have improved,” Yoshino said in an interview.

Rengo has targeted hikes of at least 6% for smaller firms to narrow the income gap with workers at bigger companies.

She spoke to Reuters hours before the Bank of Japan was set to announce its latest interest-rate decision on Friday. Traders were almost fully pricing in the chance of a rate hike.

Investing.com– President Donald Trump signed an executive order on Thursday, aimed at strengthening the United States’ position as a global leader in artificial intelligence (AI).

The order sets the stage for new policies to advance innovation while removing what the administration views as unnecessary barriers.

According to the order, published on the White House website, the U.S. must build AI systems free from “ideological bias or engineered social agendas.” The goal is to maintain America’s dominance in AI while fostering economic competitiveness, enhancing national security, and promoting human flourishing.

The order tasks top officials, including the President’s advisors on science, technology, and national security, to draft a detailed action plan within 180 days. This plan will outline steps to develop AI systems aligned with the administration’s goals. The administration emphasized the importance of clear, streamlined government policies in achieving these objectives.

The new directive revokes the previous Executive Order 14110, signed in October 2023, which focused on “safe, secure, and trustworthy” AI. It mandates a review of existing AI policies to identify and eliminate rules that may hinder innovation or conflict with the new approach. Agencies are instructed to suspend, revise, or rescind such policies wherever necessary.

In addition, the order tasks the Office of Management and Budget (OMB) with updating related directives to align with the new AI-focused strategy within 60 days.

The order reflects the administration’s emphasis on bolstering the U.S.’s competitive edge in emerging technologies. Trump framed the move as critical to ensuring the nation remains a leader in AI innovation in the global landscape.

Trump had unveiled a $500 billion joint venture, named Stargate on Tuesday, to develop a new artificial intelligence infrastructure in the U.S. The investment will be used to build extensive AI data centers and electricity generation facilities in Texas over the next four years, significantly bolstering the nation’s AI capabilities.

The project involves OpenAI, Oracle Corporation (NYSE:ORCL), SoftBank Group Corp. (TYO:9984), Microsoft Corporation (NASDAQ:MSFT), NVIDIA Corporation (NASDAQ:NVDA), and other tech leaders as investors.

By Kanishka Singh

WASHINGTON (Reuters) – U.S. President Donald Trump said his conversation with Chinese President Xi Jinping last week was friendly and he thought he could reach a trade deal with China.

WHY IT’S IMPORTANT

The leaders of the world’s two biggest economies discussed issues including TikTok, trade and Taiwan in a phone call before Trump took office on Monday.

Since taking office, Trump has spoken about a 10% punitive duty on Chinese imports because he says fentanyl is being sent from China to the U.S. via Mexico and Canada. However, he did not immediately impose tariffs as he had promised during his election campaign. Trump has also threatened tariffs against the European Union, Mexico and Canada.

KEY QUOTES

“It went fine. It was a good, friendly conversation,” Trump said of his call with Xi in an interview with Fox News aired on Thursday evening.

“I can do that,” Trump said in the interview when asked if he could make a deal with China over fair trade practices.

Trump said he would rather not use tariffs against China but called tariffs a “tremendous power.”

“But we have one very big power over China, and that’s tariffs, and they don’t want them, and I’d rather not have to use it, but it’s a tremendous power over China,” Trump added.

CONTEXT

The U.S. and China are embroiled in an array of diplomatic and economic disagreements, including an accelerating technological and military rivalry, bitter trade disputes and Washington’s concerns with the ownership of famous social media app TikTok, whose parent company is Chinese firm ByteDance.

SHANGHAI (Reuters) – China’s central bank conducted a medium-term loan operation on Friday and left the interest rate unchanged.

The People’s Bank of China (PBOC) lent 200 billion yuan ($27.46 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions at 2.00%, unchanged from the previous rate, according to an online statement from the bank.

The loan operation was meant to “keep banking system liquidity reasonably ample”, the PBOC said in the statement.

The bid rates in Friday’s operation ranged from 1.80% to 2.20%, the central bank said.

A batch of 995 billion yuan worth of MLF loans was due to expire this month.

($1 = 7.2825 Chinese yuan)

(Reuters) – British consumer confidence sank this month to its lowest level in over a year, marking the steepest drop between the months of December and January since 2011, according to a survey that added to signs of a slowdown in the economy.

The monthly consumer confidence index published by market research firm GfK fell in January to -22 from -17 in December, its lowest reading since December 2023. A Reuters poll of economists had pointed to smaller decline to -18.

The GfK survey is not adjusted for seasonal variations and has shown a tendency in recent years to fall in January, but the latest drop was larger than usual.

All five of the survey’s components declined, echoing a run of downbeat economic signals since finance minister Rachel Reeves’ Oct. 30 budget, which raised taxes on businesses to help increase funding for investment and public services.

“These figures underline that consumers are losing confidence in the UK’s economic prospects,” said Neil Bellamy, consumer insights director at NIQ GfK.

He pointed to a big rise in GfK’s savings index – which is not part of the overall consumer confidence index – as an example of the cautious mood among households.

Growth in Britain’s economy has slowed to crawl, according to the latest official data, although many economists still think the higher government spending in Reeves’ budget will help to raise growth – albeit temporarily – later this year.

The Bank of England is widely expected by investors to cut interest rates on Feb. 6.

By Rae Wee

SINGAPORE (Reuters) – The yen was front and centre for currency markets on Friday ahead of a Bank of Japan (BOJ) policy decision where it is all but certain to raise interest rates, while the dollar was headed for its worst week in two months.

The BOJ concludes its two-day policy meeting later in the day and markets have fully priced in a 25-basis-point hike, with comments from BOJ officials in recent times also hinting at such a move.

Ahead of the decision, the yen was little changed at 156.11 per dollar, languishing near a one-week low hit in the previous session.

The Japanese currency surged last week on heightened expectations for a rate hike but has since given up some of those gains as traders also await further clarity on the BOJ’s policy outlook.

“The BOJ is likely to proceed with a rate hike,” said Vincent Chung, co-portfolio manager for T. Rowe Price’s diversified income bond strategy.

“We expect this initial rate increase in 2025 to be followed by a series of gradual hikes, potentially bringing the policy rate to 1% by the end of the year. The policy rate could even exceed 1%, as this is closer to the lower end of the BOJ’s neutral rate range.”

Analysts said it would take a hawkish hike from the BOJ to prevent the yen from falling anew after Friday’s decision, with officials likely needing to signal further rate increases ahead.

The euro rose 0.07% to 162.66 yen in the early Asian session, while sterling ticked up 0.08% to 192.80 yen.

Underscoring expectations for a rise in borrowing costs on Friday, data showed Japan’s core consumer prices rose 3.0% in December from a year earlier to mark the fastest annual pace in 16 months.

DOLLAR BLIP

Elsewhere, the dollar was headed for its worst weekly fall in two months, after U.S. President Donald Trump’s widely expected tariff announcements did not materialise following his inauguration, unlike what he had threatened during his campaign.

The greenback was set to lose 1.2% against a basket of currencies, its steepest decline since November. The dollar index was last 0.06% lower at 108.08 on Friday.

The euro, meanwhile, rose 0.03% to $1.0419 and was headed for a 1.4% weekly gain, which would mark its best performance since November.

Sterling last bought $1.2353 and was similarly poised for a rise of 1.5% for the week, snapping three straight weeks of losses.

Also adding to headwinds for the dollar were comments from Trump demanding that the Federal Reserve cut interest rates, arguing he understands monetary policy better than those charged with setting it.

“The Trump comments … are a reminder that we’re just going to have this constant source of volatility coming from off-the-cuff comments, and of course, it does on paper challenge a little bit of that Fed independence,” said Rodrigo Catril, senior FX strategist at National Australia Bank (OTC:NABZY).

Trump’s remarks come just days before the Fed’s first policy meeting to be held during his administration, with very broad expectations officials will leave rates unchanged.

Elsewhere, the Australian dollar dipped 0.05% to $0.6282, though it was on track for the best week since September with a rise of 1.5%.

The New Zealand dollar eased 0.04% to $0.5674, but was likewise headed for a 1.6% weekly gain, also its best since September.

By Leika Kihara

TOKYO (Reuters) – Japan’s core consumer prices rose 3.0% in December from a year earlier to mark the fastest annual pace in 16 months, data showed on Friday, keeping alive market expectations that the central bank will keep raising ultra-low interest rates.

The data comes hours before the Bank of Japan concludes its two-day policy meeting, when it is expected to raise short-term interest rates to 0.5% from 0.25%.

The increase in the core consumer price index (CPI), which excludes the impact of volatile fresh food prices, matched a median market forecast and followed a 2.7% gain in November.

It was the largest year-on-year increase since a 3.1% gain marked in August 2023.

The rise was due largely to the phase-out of government subsidies aimed at curbing utility bills, and the impact of stubbornly high food prices as the weak yen kept import costs elevated.

An index stripping away the effect of both fresh food and fuel costs, which is closely watched by the BOJ as a better gauge of price pressure driven by domestic demand, rose 2.4% in December from a year earlier, steady from November.

The BOJ ended negative interest rates in March and raised its short-term rate target to 0.25% in July on the view Japan was on track to sustainably meet the bank’s 2% inflation target.

Governor Kazuo Ueda has signalled readiness to raise rates further if broadening wage hikes underpin consumption and allow companies to keep hiking prices not just for goods but services.