Created on January 07, 2026

• I am not interested in shorting, as the interest rate differential is simply too great here.
• The British pound initially pushed higher against the Japanese yen during trading on Tuesday, but has since pulled back just a bit.
• All things being equal, this is a market waiting for some type of reason to go higher, and that reason will more likely than not come into play via risk appetite.
• Regardless, this is a market that is very obviously strong, and I have no interest in fighting the overall trend.

The market could end up being a scenario where we just remain buy on the dips and slowly grind higher. When you look at the chart, you can see that the Monday session was a serious attempt to break out of a bullish flag, and if we look at that as a bullish flag, then we could be looking at a move to 216 yen based on the measured move.

Carry Trade Momentum

Ultimately, this is a scenario where I don’t have any interest in shorting this market because, quite frankly, I don’t want to pay the interest rate differential. Even though the Bank of England has recently cut rates, it is going to do so very slowly, while the Japanese are supposedly raising rates.

The situation is that the interest rate differential is so wide that it’s going to take a long time for that to truly come into play. You could also make an argument that most traders believe that the Japanese can only raise rates so high due to their debt load. With that being the case, we find ourselves in, and of course, the overall momentum, I think the carry trade is alive and well, and I will continue to take advantage of it by buying the British pound against the Japanese yen going forward.

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Christopher Lewis has been trading Forex and has over 20 years experience in financial markets. Chris has been a regular contributor to Daily Forex since the early days of the site. He writes about Forex for several online publications, including FX Empire, Investing.com, and his own site, aptly named The Trader Guy. Chris favours technical analysis methods to identify his trades and likes to trade equity indices and commodities as well as Forex. He favours a longer-term trading style, and his trades often last for days or weeks.

Created on January 07, 2026

• The Euro has stabilized against the British Pound on Tuesday as we find ourselves testing the crucial 200-Day EMA.
• If it holds, a “fade the rally” move could set up.
• The fundamental context in this pair is that the British Pound had been trading very weakly against the Euro.

The interest rate cut from the Bank of England was more or less a hawkish cut, meaning that they brought rates down to 3.75% but they also mentioned the resilient service sector and the FTSE 100’s break above the 10,000 level as signs that there is still a lot of belief in the growth of the UK economy and perhaps it’s not as sluggish as people had thought. They thought that the central bank would have to come in and save everybody essentially.

Market Outlook and Key Levels

Conversely, the Euro has been struggling with risks following the Bulgarian entry into the Eurozone and a wait-and-see approach from the ECB. German inflation data has been released during the session; it’s easing towards 2.2%. It reinforces the view that the ECB doesn’t have a lot of room for hawkish surprises and therefore they probably have to sit fairly still. This could continue to hamper any Euro strength not only here, but everywhere else as well.

If we do rally from here, the market reaching towards the 0.8725 level is a very real possibility, with the 0.8750 level above there being an area that I would watch.

If we break down below the 200-day EMA, then the 0.86 level is your initial support, and if we break down below that, the bottom falls out here. I do think we are in the midst of some type of trend change, but we’ll just have to wait and see. I prefer to fade rallies that show signs of exhaustion.

Ready to trade our daily forecast and analysis? Here’s a list of some of the top forex brokers UK to check out.

Christopher Lewis has been trading Forex and has over 20 years experience in financial markets. Chris has been a regular contributor to Daily Forex since the early days of the site. He writes about Forex for several online publications, including FX Empire, Investing.com, and his own site, aptly named The Trader Guy. Chris favours technical analysis methods to identify his trades and likes to trade equity indices and commodities as well as Forex. He favours a longer-term trading style, and his trades often last for days or weeks.

– Written by


Ben Hughes

STORY LINK Pound-to-Dollar Forecast: GBP/USD Near Breakout, But Risks Remain

The Pound to Dollar exchange rate (GBP/USD) climbed to three-month highs after rebounding from support in the low-1.34s, but the pair now faces stiff resistance as trading conditions thin and the dollar attempts to stabilise.

The next move will determine whether sterling can build momentum into the new year.

GBP/USD Forecasts: 3-Month Highs

The Pound to Dollar (GBP/USD) exchange rate found support below 1.3420 on Monday and rebounded strongly to above 1.3500 amid a firm Pound performance and dollar setback.

GBP/USD hit 3-month highs near 1.3570 before consolidation just below 1.3550 with markets still assessing whether there is scope for a decisive breakout.

According to UoB; “Although upward momentum has not increased significantly, GBP could rise to 1.3590. Currently, the odds of a continued rise above this level are not high.”

Scotiabank added; “Risk reversals are little changed, offering little in terms of sentiment-driven movement. We are neutral awaiting a break of the two-week range roughly bound between 1.34 and the mid1.35s.”

Overall risk appetite has held steady with the UK FTSE 100 index posting a fresh record high while there were further gains for precious metals and commodities.

The Pound will gain net support if risk appetite holds firm.

The dollar failed to gain sustained support from geo-political considerations, but there is a high degree of uncertainty over both Venezuela and the wider regional considerations.

ING is not convinced that there will be sustained dollar losses; “Despite the quick unwinding of safe-haven USD demand yesterday, we remain modestly biased to a stronger dollar in the near term. Seasonality is positive in January, and markets’ sanguine stance on geopolitics leaves risk assets and high-beta currencies exposed to re-escalations, both in Latam and potentially in Greenland.

Danske Bank also preached some caution; “Global markets generally performed well on Monday, but President Trump’s threats against Colombia and Mexico, along with renewed talk of annexing Greenland, underscore that geopolitical tensions remain elevated as the new year begins.”

The US ISM manufacturing index edged lower to 47.9 for December from 48.2 previously. This was slightly below consensus forecasts and the sector has been in contraction territory for the last 8 months which hampered the dollar.

Capital Economics commented; “The modest decline in the ISM Manufacturing Index in December confirms that the sector was struggling for momentum around the turn of the year, but we doubt that this will be enough to prevent overall GDP from expanding at a solid pace in the coming quarters.”

The dollar could gain some net support if the overall US economy holds firm, but the global perspective will also be important.

MUFG commented; “Evidence of strengthening global growth momentum is a supportive factor for our forecast for the US dollar to weaken further in 2026 even as US economic growth is expected to pick-up as well during the first half of this year driven by stimulus from President Trump’s One Big Beautiful Bill.”

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TAGS: Pound Dollar Forecasts

• The USD/JPY forecast tilts to the downside as BoJ-Fed divergence favors yen.
• Risk-off sentiment strengthens yen but limits gains amid dollar’s own haven appeal.
• Today’s US ADP jobs report is crucial to watch, along with the US ISM PMI and JOLTS data.

The USD/JPY remains under mild pressure as the Japanese yen continues to find support from changing policy expectations and a weaker US dollar backdrop. Momentum has obviously slowed, indicating growing uncertainty over the next directional move, even though the pair is still trading at high levels around the mid-156 area. The market is increasingly focused on the widening policy divergence between the Bank of Japan, which is cautiously tightening, and the Federal Reserve, which is edging closer to an easing cycle.

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The yen’s recent resilience is largely driven by the growing acceptance that the BoJ’s long-awaited normalization process is not a one-off move. Governor Kazuo Ueda’s most recent remarks reaffirmed the likelihood of further interest rate hikes if inflation remains elevated. Rising wages, persistent pressure on service sector prices, and tighter labor conditions strengthen the argument for gradual tightening. This change has already caused yields on Japanese government bonds to reach multi-decade highs, reducing one of the main causes of yen weakness and closing the yield gap with the US.

At the same time, investors remain cautious about pushing the yen too aggressively higher. Uncertainty around Japan’s fiscal outlook, highlighted by the approval of a record budget, and questions over the exact timing and pace of future BoJ hikes continue to temper bullish conviction. As a result, USD/JPY has avoided a sharp sell-off and instead is grinding lower in a controlled manner.

Geopolitical risks add another level of complexity. The demand for safe havens has been boosted by growing tensions associated with Venezuela and other global flashpoints. However, the dollar’s inflows during periods of high US yields have lessened the yen’s influence. Even so, upside movements are still constrained, especially in the upper 150s, by the possibility of verbal intervention from Japanese authorities.

On the US side, the dollar is struggling to find sustained support. Markets are increasingly pricing in further Federal Reserve rate cuts later this year, with policymakers stressing the need to stay data-dependent as inflation cools and labour market conditions soften. This week’s run of US data, including ADP employment figures, ISM Services PMI, and JOLTS, may influence short-term moves, but the main event remains Friday’s Nonfarm Payrolls report. A weaker-than-expected jobs reading would likely reinforce expectations of a dovish Fed and put renewed downside pressure on USD/JPY.

USD/JPY Technical Forecast: Consolidating Near Key MAs

The USD/JPY 4-hour chart shows consolidation between 20- and 50-period MAs, while the confluence of 100- and 200-period MAs supports the pair’s upside bias. The RSI also remains flat under the 50.0 level, suggesting no clear bias in the short term.

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A break above the 20-period MA at 156.60 could trigger a bullish breakout and look to test 157.30 ahead of 157.75. On the other hand, moving below the 200-period MA at 156.10 could prompt the pair to test the 155.55 support level ahead of 155.00.

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The GBPJPY pair ended the last bullish rally by recording 212.15 level, to bounce directly to settle near 211.30, which formed strong obstacle against the bullish attempts.

Note that the stability within the main bullish levels and forming extra support at 211.30 level, which makes us wait for gathering bullish momentum to reinforce the chances of recording the target at 212.55 and surpassing it might extend trading towards 213.75, while reaching below 211.30 and providing negative close will confirm delaying the bullish attack, to begin forming temporary corrective wave, to target 210.65 and 209.90 level.

The expected trading range for today is between 211.00 and 212.50

Trend forecast: Bullish

Created on January 07, 2026

• The US dollar has been a bit choppy against the Japanese yen early on Tuesday, as we continue to see a lot of noisy trading behavior.
• This is not a surprise considering that Friday is the non-farm payroll announcement and that will have a major influence on the US dollar and quite often influences the bond market, which has a major influence on this pair.
• That being said, we are essentially in the middle of an overall consolidation range between 158 yen on the top and 154.5 yen on the bottom.
• Over the longer term, I think the interest rate differential continues to be a major driver of where we go, and that, of course, favors the United States dollar.

The Potential Strengthening Point for the Yen

We might have a bit of a shrinking of the interest rate differential over the next several months, but I do not think it is likely to be enough to turn the market around on its own. The one thing that could come into the picture as a potential strengthening point for the yen would be if we get some type of economic problem that affects the globe or geopolitical concerns.

This is a market that generally favors the US dollar due to interest rate differential, but if we have a major risk-off event, then traders will, of course, come running to the Japanese yen.

As long as we stay above the 154.5 yen level, I think buying the dips will continue to be the move, as the interest rate differential continues to get you paid at the end of each session. The carry trade seems to still be alive and well at the moment.

Want to trade our USD/JPY forex analysis and predictions? Here’s a list of forex brokers in Japan to check out.

Christopher Lewis has been trading Forex and has over 20 years experience in financial markets. Chris has been a regular contributor to Daily Forex since the early days of the site. He writes about Forex for several online publications, including FX Empire, Investing.com, and his own site, aptly named The Trader Guy. Chris favours technical analysis methods to identify his trades and likes to trade equity indices and commodities as well as Forex. He favours a longer-term trading style, and his trades often last for days or weeks.

The EURJPY pair suffered strong negative pressures, reaching below the bullish channel’s support at 183.45 level, to suffer intraday losses by targeting 182.80 level, which forms a key support level to take advantage of its rally towards 183.40.

The confinement between extra support at 182.80 and 183.60 level makes us expect extending the support of the broken bullish channel, to keep the neutrality until confirming the trend by surpassing one of these levels, note that the price rally above 183.60 will reinforce the chances of renewing the bullish attempts, to expect targeting 184.40 barrier, and surpassing it will form next target at 184.90 level in the bullish trading.

The expected trading range for today is between 182.80 and 183.60

Trend forecast: Neutral

Position and Upside Risk

In my view, bets on more BoJ rate hikes, threats of yen intervention, and expectations of Fed rate cuts suggest a negative price outlook. However, the BoJ neutral interest rate and incoming US economic data will be pivotal, given the focus on US-Japan rate differentials.

A higher neutral interest rate level would signal multiple BoJ rate hikes and a narrower US-Japan interest rate differential. A narrower rate differential would likely trigger a yen carry unwind, sending USD/JPY toward 140 over the longer term.

However, upside risks to the bearish outlook include:

• Dovish BoJ rhetoric and neutral interest rate in the range of 1% and 1.25%.
• Upbeat US economic indicators.
• Hawkish Fed chatter.

These events would send USD/JPY higher. However, the threat of yen interventions is likely to cap the upside at the 158 level, based on the latest communication.

Read the full USD/JPY forecast, including chart setups and trade ideas.

Conclusion: Focus on the BoJ Neutral Rate

In summary, the USD/JPY trends will hinge on the BoJ’s neutral rate and the Fed rate path.

A neutral rate in the range of 1.5% to 2.5% would suggest a more hawkish BoJ rate path. Additionally, dovish Fed chatter would support expectations of narrower rate differentials, reinforcing the bearish outlook for USD/JPY.

Crucially, a sharply stronger yen could kickstart an unwinding of yen carry trades, which would likely push USD/JPY toward 140 over the longer 6-12 month time horizon.

For more in-depth analysis, review today’s USD/JPY trading setups in our latest reports and consult the economic calendar.