US
USD is building on its post-FOMC meeting gains. Yesterday, US weekly jobless claims indicated no evidence of a layoff spiral. Claims for the week ended September 13 (the BLS survey week) dropped more than expected, reversing the large jump in the prior week. Near-term, USD can retrace more of its recent losses before settling into its August range as yield spreads show little scope to move further against USD.
Fed Governor Stephen Miran is scheduled to give two TV interviews later today. Miran, who broke ranks by backing a 50bps cut this week, is poised to unpack his more dovish policy stance.
Beyond the near-term, the USD downtrend is intact. The US July TIC flows point to a modest pullback in foreign demand for US securities. On a 12-month cumulative basis, foreign investors trimmed their holdings of long-term US securities to $1500bn from a record high of $1540bn in June. The Trump administration’s effort to narrow the US trade deficit means fewer dollars will flow overseas, reducing the need for those funds to be recycled back into US securities.
JAPAN
USD/JPY saw a kneejerk decline before broader USD strength took over. Bank of Japan (BOJ) delivered a hawkish hold. As was widely expected, the BOJ kept the policy rate at 0.50% and Governor Ueda stuck to the guidance of raising rates if the outlook for economic activity and prices will be realized.
However, unlike at the other meetings this year, the vote to stand pat was not unanimous. Two of the nine board members (Takata Hajime and Tamura Naoki) favored a 25bps hike to 0.75% arguing that risks to prices are becoming more skewed to the upside.
The BOJ also announced a plan to sell its holdings of ETFs and J-REITs at an annual pace equal to about 0.05% of market trading volume. The disposal of these assets will have no material effect on monetary policy as they account for about 5% of the BOJ’s total assets.
In our view, the BOJ is on track to resume normalizing rates at the next October 29-30 meeting, which coincides with the release of its updated Outlook Report. The swaps market price-in 50% odds of an October rate increase. We see room for USD/JPY to edge down towards the lower-end of its multi-month 140.00-150.00 range. USD/JPY is trading well-above the level implied by US-Japan 2-year bond yield spreads.
UK
GBP and gilts are underperforming on a worsening UK fiscal backdrop. The deficit totaled £18bn in August, more than the £12.5bn forecast in March by the Office for Budget Responsibility (OBR). To shore up the deteriorating fiscal position, the UK government will likely prioritize tax hikes over spending cuts in the budget due on November 26.
As such, the risk is the BOE resumes easing sooner than is currently priced-in (March/April 2026) to offset the drag from fiscal policy. Meanwhile, the ECB is in a good place to keep rates on hold. Bottom line: EUR/GBP faces additional upside potential.
UK retail sales growth overshot expectations in August underpinned by the good weather. Total retail sales volumes rose 0.5% m/m (consensus: 0.4%) vs. 0.5% in June. Excluding auto fuel, retail sales volumes increased 0.8% m/m (consensus: 07%) vs. 0.4% in June driven by non-store retailers and clothing stores sales.
The Bank of England (BOE) delivered on expectations yesterday. The BOE kept the policy rate at 4.00% and reiterated its guidance for “a gradual and careful approach” to further rate cuts. In line with consensus, the vote split was 7-2 in favor of steady rates, with the dissenters supporting a 25bps cut (Taylor and Dhingra).
The BOE also voted by a majority of 7-2 to reduce the stock of UK government bond purchases by £70bn between October 2025 to September 2026 vs. £100bn the previous 12-months. The new gilt runoff pace was within the range (£60bn-£75bn) anticipated by market participants. One MPC member preferred to maintain the gilt runoff pace at £100bn while another preferred to slow the pace down to £62bn.
