Yen slides versus dollar, Nikkei 225 nears record high

Editor's note: Fawad Razaqzada is a senior market analyst from Forex.com. The article reflects the author's opinions and not necessarily the views of CGTN. 

The US dollar (USD) has had a slightly choppy start to the year. What's notable, though, is how quickly markets have brushed aside the geopolitical noise – not just from Venezuela, but also from Greenland.

With geopolitics taking a back seat, attention turns firmly to the US data calendar. This week's employment indicators could influence the USD or Japanese yen (JPY) forecast and the near-term direction of other major pairs.

Geopolitics fail to rattle risk appetite

Following the weekend's dramatic headlines out of Venezuela, the dollar started the first full trading week of 2026 on the front foot. The euro and Swiss franc softened, while gold, silver, and equity markets all pushed higher. Oil prices were more volatile, swinging sharply before slipping back on Tuesday amid concerns about additional supply entering the market. Oil prices softened after US President Donald Trump suggested the US could take control of up to 50 million barrels of Venezuelan crude.

But the broader market reaction has been notably muted. The dollar has clawed back some ground, though this appears more likely to be due to seasonal inflows and weakness in the euro (hit by weaker data) than any geopolitical premium.

As mentioned, the market response has been mixed rather than defensive. That suggests investors are not expecting immediate escalation, instead weighing short-term uncertainty against longer-term implications for Venezuelan oil production. While deeper US involvement in Venezuela, or any form of military action linked to Greenland, would be more market-moving – potentially driving some flows back into the yen – risk appetite remains intact for now. That backdrop continues to underpin USD/JPY.

All eyes back on US labor data

A raft of US employment reports is due for the rest of this week, which could help shape market expectations for the early part of January.

Historically, the dollar often struggles in December before finding its feet again as the new year gets underway. With a large chunk of Federal Reserve easing already priced in, dollar bears may find it hard going unless the data takes a clear turn for the worse. Any upside surprises, therefore, should help support the USD/JPY forecast, particularly with the yen still under pressure amid a lack of meaningful pushback from either the Bank of Japan or the Japanese government.

Admittedly, it hasn't been the strongest start to the year for US macro numbers, with this week's ISM manufacturing purchasing managers' index coming in on the soft side. That said, it followed a run of stronger-than-expected data towards the end of 2025, including jobless claims, pending home sales, and Q3 GDP. Growth in Q3 was revised up to an annualized 4.3 percent, well above the 3.3 percent consensus, which complicates the argument for aggressive Fed rate cuts this year.

At present, markets aren't fully pricing in the next 25 basis point cut until June, with a second one pencilled in for September. Those expectations could easily be pared back if the upcoming labor market data come in firm.

With the Fed now more focused on employment than inflation, labor market data carries added significance for the dollar. For now, the near-term outlook for the greenback remains neutral to mildly constructive.

Technical USD or JPY forecast: Price action still favors the upside

From a technical point of view, despite this week's pullback from the 157.00 area, the path of least resistance for USD or JPY still looks higher. The main bearish argument at this stage is that the pair failed to post a fresh 2025 high during the rally that began back in April. The move stalled just below 158.00 in November, leaving the January 2025 peak at 158.88 intact.

That said, this looks more like consolidation than a trend reversal on the USD/JPY chart. The key levels to watch are trend support from the broader triangle pattern and the 21-day exponential moving average, both sitting around the 156.00 area. As long as the bulls can defend that zone, the upside bias remains intact. A clear break below it, however, would open the door to a deeper pullback towards 155.00 once again.

Nikkei remains in a strong uptrend

The Nikkei 225 delivered another standout performance in 2025, rising 25 percent to mark its third consecutive year of gains above 20 percent. That rally extended the index's advance from the 2008 low to more than 13,000 percent, while a wide 72 percent high-to-low range made it the most volatile year in five.

Whether bulls can repeat that level of exuberance in 2026 remains uncertain. While the Nikkei pushed to fresh record highs on Tuesday, momentum signals are showing early signs of fatigue, suggesting further upside may prove harder to sustain without broader participation.

There are signs showing that net-long positioning among large speculators (blue line) and asset managers (light-blue histogram) has been falling in recent weeks, with both cohorts drifting closer to net-short territory.

This shift is largely driven by a reduction in gross long positions, although gross shorts among large speculators have also risen over the past two weeks. While this does not point to an imminent bearish reversal, it is a development worth monitoring as the year progresses.

Nikkei 225 key stock drivers and risk signals

Mitsubishi UFJ Financial Group (MUFG) remains the largest Nikkei stock by market capitalization and continues to trade in a strong uptrend after printing a fresh record high earlier this week. It is difficult to lean bearish on the Nikkei while its most influential heavyweight remains so resilient, suggesting any near-term pullbacks are still likely to be viewed by bulls as opportunities to reload unless a sharp reversal emerges.

SoftBank Group, however, is telling a different story. The Nikkei's second-largest stock by market cap is carving out a potential bearish continuation pattern on the daily chart, with price set to close back beneath its 20- and 50-day exponential moving averages (EMA). This keeps the risk skewed lower, with a move back towards the 4,000 area increasingly plausible near the high-volume node (HVN) of the current consolidation. A break below 3,795 would confirm the next leg lower within its broader bearish daily trend.

Sony Group is showing tentative signs of stabilization around its 200-day simple moving average (SMA) and EMA levels that often prove difficult to break on the first test. Heavy volume accompanied yesterday's decline into these averages, and today's inability to push decisively lower may prompt some short covering and allow for a modest bounce. However, unless buying pressure accelerates meaningfully, downside risks remain given the prevailing bearish daily trend and lack of convincing accumulation.

Fast Retailing has been trading sideways in a tight range since December, with Tuesday's bullish bar failing to break above 58,000 and subsequent price action hinting it may have marked a lower high. While we've yet to see strong follow-through from bears, a pickup in volume alongside a renewed price decline could tip the balance in favor of Nikkei bears over the near term and prompt a deeper pullback from the record high set earlier this week.

For the Nikkei 225 index, the 51,000 handle and December high now appear to be the next downside focus, with a break below this zone opening the door towards 50,500, where the 20- and 50-day SMAs converge alongside the December VPOC (volume point of control). With MUFG retracing from recent highs and the next three largest Nikkei stocks by market capitalization failing to show convincing bullish follow-through, the path of least resistance may remain lower into the week, allowing bulls to reassess the potential for another breakout attempt. 

(Cover via VCG)