The yen climbed higher on Monday after stronger-than-expected Japanese GDP data bolstered expectations for further monetary tightening from the Bank of Japan (BOJ). Meanwhile, the U.S. dollar remained under pressure following weak economic data, while the Australian and New Zealand dollars held steady ahead of key interest rate decisions this week.

Yen Gains on Strong GDP, BOJ Policy in Focus

Japan’s economy expanded at a faster pace in the fourth quarter, strengthening the case for additional rate hikes from the BOJ this year. The yen reversed earlier losses, rising 0.27% to 151.94 per dollar following the data release.

While the Q4 GDP boost wasn’t broad-based, analysts believe it supports a more aggressive tightening stance from the BOJ. Traders are now pricing in approximately 35 basis points of rate hikes by December, indicating growing confidence that Japan’s central bank will continue its shift away from ultra-loose monetary policy.

“Even though the jump in Q4 GDP wasn’t broad-based, it supports our view that the Bank of Japan will tighten policy more aggressively this year than most anticipate,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

Dollar on the Back Foot as Rate Cut Bets Grow

The U.S. dollar continued to struggle after a selloff triggered by Friday’s weak U.S. retail sales data. The dollar index last stood at 106.79, following a 1.2% decline last week. Traders are increasingly betting on more Federal Reserve rate cuts this year as signs of slowing economic momentum emerge.

Geopolitical developments also played a role in market sentiment. Reports of upcoming talks in Saudi Arabia aimed at resolving the Russia-Ukraine conflict kept the euro supported. The euro edged closer to $1.05, last trading at $1.0487, while sterling was little changed at $1.2582.

According to Rodrigo Catril, senior FX strategist at National Australia Bank, multiple factors are weighing on the greenback:

• Uncertainty surrounding Donald Trump’s reciprocal tariffs, with recent optimism that they may not be as disruptive as initially thought.
• Ongoing geopolitical tensions in Ukraine.
• U.S. economic data signaling that the country’s exceptional economic strength may be waning.

“The dollar weakness was a function of both ongoing optimism that maybe tariffs are not going to be as disruptive as originally thought… and then the data, of course, playing to the idea that maybe the U.S. exceptionalism is running out of steam,” Catril noted.

RBA & RBNZ Expected to Deliver Rate Cuts

In the Asia-Pacific region, traders are closely watching central bank decisions from Australia and New Zealand.

• The Reserve Bank of Australia (RBA) is expected to cut rates by 25 basis points on Tuesday, marking its first reduction in over four years as it joins other major central banks in easing monetary policy. The Australian dollar inched up 0.07% to $0.6357 ahead of the decision.
• The Reserve Bank of New Zealand (RBNZ) is expected to cut rates by 50 basis points on Wednesday. The New Zealand dollar also saw modest gains, rising 0.03% to $0.5734.

With the yen strengthening and the dollar struggling, market attention now turns to upcoming policy decisions from the RBA and RBNZ and potential signals from the Federal Reserve regarding its rate path. Additionally, geopolitical developments in Ukraine and global trade policy could further influence FX movements in the coming weeks.

As markets digest these key factors, traders will be watching closely to see if the yen’s rally continues, how deep Fed rate cuts might go, and whether the Aussie and Kiwi dollars respond to their respective central bank moves.