US
USD is powering forward, largely driven by the slump in JPY. Meanwhile, the broader shift towards more hawkish central banks is nudging long term bond yields higher and taking some air out of stocks, despite the pullback in crude oil prices.
Going forward, tightening by other major central banks limits policy divergence with the Fed and suggests USD is unlikely to make new cyclical highs. But the US growth advantage relative to other major economies skews USD risk to the upside. Next week’s September S&P Global PMI readings will likely show US maintaining its growth edge over the Eurozone, UK, and Japan.
US August industrial production and a couple of Fed speakers are due today; Kansas City Fed President Jeff Schmid (non-FOMC voter), and Fed Governor Michelle Bowman.
JAPAN
JPY is underperforming across the board, with USD/JPY up nearly two big figures to 158.00. The Bank of Japan delivered on expectations but kept the bar high for a more hawkish stance. As was widely expected the BOJ raised the policy rate 25bps to 1.25% and reiterated that it “will continue to raise the policy interest rate.” The signals were cautious:
First, the 7-2 vote in favor of a hike, included two dissents (Asada Toichiro and Sato Ayano) in favor of holding rates steady.
Second, the BOJ expects growth to moderate and underlying inflation to reach 2% only between the second half of fiscal 2026 and fiscal 2027.
Third, BOJ Governor Kazuo Ueda warned that rapid rate hikes could unsettle asset prices, adding that it could take some time to confirm that 2% inflation is entrenched. To his point, headline and core CPI inflation remained under 2% y/y in August.
Bottom line: the Fed’s hawkish hike and the BOJ’s cautious tightening tilt USD/JPY higher, leaving our bearish USD/JPY view plainly wrong. The next two key resistance levels for USD/JPY are offered at 158.42, the 200-day moving average, and 160.00. FX intervention risk will increase as we get closer to 160.00, raising the cost of shorting JPY and limiting the scope for an overshoot.
UK
GBP/USD is consolidating just above yesterday’s lows of 1.3336. UK August retail sales surprised to the upside, reversing July’s decline. Total retail sales volumes increased 0.5% m/m (consensus: -0.2%) vs. -0.5% in July. Excluding automotive fuel, retail sales were up 0.6% (consensus: -0.2%) vs. -0.9% in July.
The data firmed up odds of a 25bps BOE rate hike in November to as much 90% from 83%. Still, BOE Governor Andrew Bailey flagged yesterday that a rate hike hinges on whether “the Middle East persists for an extended period, as appears to be the case, and the risk of second-round effects emerging increases.”
The swaps curve continues to imply about 100bps of BOE rate hikes in the next twelve months to 4.75%. In our view, the BOE may not need to tighten as much as markets expect. The UK economy is already operating below capacity, Bank Rate at 3.75% is near the top of the BOE’s estimated 2% to 4% neutral range, and fiscal policy will likely turn more restrictive. Bottom line: GBP remains vulnerable to a dovish BOE repricing.
