The USD/JPY held its gains on Friday, but the US dollar index fell this week, ending its six week streak of gains. Investors are waiting for clues about Trump's presidential inauguration ceremony and the direction of incoming government policies.

The Japanese yen hit its strongest weekly performance in over a month, dragging down the US dollar and raising expectations for the Bank of Japan to raise interest rates next week. The Japanese yen rose more than 1% against the US dollar this week, reversing last week's decline and hitting a one month high of 154.98 yen earlier on Friday. However, the US dollar rose 0.68% against the Japanese yen at the end of the session, closing at 156.165 yen.

Brad Bechtel, Global Head of Foreign Exchange at Furui, stated that the Japanese yen will continue to be closely linked to US interest rates, and I believe the cooling this week will help alleviate the pressure on the US dollar against the Japanese yen. The Bank of Japan seems ready to raise interest rates next week, which will marginally benefit the yen. However, due to the significant difference in interest rates, it is difficult for the US dollar to truly fall sharply against the Japanese yen.

The statements from Bank of Japan officials and Japanese data pointing to sustained price pressures and strong wage growth have helped boost market confidence in the upcoming interest rate adjustment, with traders seeing an 80% chance of a rate hike next week.

Sources say that the Bank of Japan is likely to raise interest rates next week, unless there is any market shock after Trump takes office.

In the past few weeks, the US dollar has surged due to the rise in US Treasury yields, reflecting expectations that Trump's policies may stimulate inflation in an already strong US economy. But on Wednesday, the United States released softer core inflation data, and on Thursday, Federal Reserve Governor Waller said that if the data supports it, it is still possible to cut interest rates three to four times this year, giving the bond market a breathing space from the ruthless sell-off. This has led to increased market bets on the Fed's interest rate cuts this year, putting some pressure on the US dollar before Trump returns to the White House next week. At present, the money market believes that the United States will cut interest rates by about 40 basis points by 2025.

Uto Shinohara, Senior Investment Strategist at Mesirow Currency Management, stated that in response to lower than expected inflation data over the past week, market participants have adjusted their expectations for interest rate cuts from 25 basis points to 40 basis points. It is worth noting that these market expectations have returned to the level before last Friday's strong employment report, indicating that the impact of these two economic data is actually offsetting each other. "

He added that this model highlights the sustained sensitivity of the market to inflation and labor market data. As Federal Reserve officials enter a period of silence and there are almost no important US economic data releases next week, Shinohara said, "The market will be watching the beginning of President Trump's term and its potential impact on the market

Investors are now waiting for Trump's inauguration speech next Monday to better understand his policy actions and anticipate fluctuations.

The pound fell 0.6% to $1.2166, not far from the 14 month low it hit on Monday. The data released on Friday showed that retail sales in the UK unexpectedly declined in December, increasing the risk of economic contraction in the fourth quarter.

EUR/USD fell 0.26% to $1.0276. The US dollar index rose 0.34% to 109.33, far from the over two-year high hit earlier this week. The US dollar index is expected to decline by about 0.25% this week, breaking six consecutive weeks of gains.

The South African rand rose on Friday after a turbulent week, as investors shifted their focus to the inauguration of US President elect Trump next Monday. The US dollar was trading at 18.71 against the rand, down about 0.6% from the previous trading day's closing price.