Yen bulls have adopted sterling as the new favored short in a risk-off run-up to U.S. payrolls and the inauguration of President-elect Donald Trump.

Friday’s U.S. job report may be dud for USD/JPY. The median forecast for non-farm payrolls is a 160K increase in December, with average earnings expected to rise 0.3% month-over-month. Options breakeven of about 105 pips points to a potential range of 156.85 to 158.95, with the latter challenging a July 16, 2024 high. A surprisingly soft jobs report may reignite expectations for a Fed rate cut and could prompt USD/JPY to test the lower end of the 156.02-158.55 range that has held since the December policy meeting. Nonetheless, demand for haven currencies may linger until Trump’s tax and tariff positions are clarified post-inauguration, with uncertainty surrounding U.S. budgets and trade holding back yen sellers. Budget concerns and rising yields are already weighing on GBP/JPY, which has become a popular short. GBP/JPY's inability to move above 200 has bear's salivating. A decline below 188, and then 180, would challenge a three-year uptrend. Whether weakness in GBP/JPY translates into a lower USD/JPY may depend on U.S. stock market performance and upcoming economic data. Ahead of the inauguration, markets will assess next week’s speech from BOJ Deputy Governor Himono. Thursday's wage data and the regional branch managers’ report did little to shift expectations for a BOJ hike in January, with odds lingering below 50%. Markets see two hikes of 25 basis points by year-end. With just two of the nine regions revising their 2025 growth projections upward and five qualifying their moderate growth outlooks, this could be the right forecast.

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(Robert Fullem is a Reuters market analyst. The views expressed are his own.)

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