US

USD pared back some of Friday’s loss due to JPY weakness. Versus other major currencies, USD remains under downside pressure. We expect the Fed to prioritize maximum employment over price stability within its dual mandate given that monetary policy is moderately restrictive. As such, a more dovish Fed policy stance can drag USD lower and underpin the rally in risk assets. The steeper pullback in US labor demand in August lifted odds of a September Fed funds rate cut from zero to as much as 20% before stabilizing at currently 12%.

The August New York Fed consumer survey of inflation expectations is today’s highlight (4:00pm London, 11:00am New York). US inflation expectations are anchored and leaves room for the Fed to ease policy.

JAPAN

JPY and JGBs dropped briefly. Japan’s Prime Minister Shigeru Ishiba has resigned as the leader of the ruling Liberal Democratic Party (LDP) on Sunday. The LDP will discuss the date for the leadership contest and the specifics of the vote tomorrow. In the meantime, the market narrative is that a leadership change opens the door to more expansionary fiscal and monetary policy in Japan. One reason is that a leading candidate to replace Ishiba as prime minister is Sanae Takaichi. Takaichi opposes Bank of Japan rate hikes and advocates for higher government spending.

Regardless, whoever is the next prime minister faces deep legislative gridlock as the LDP does not have majorities in both bouse of parliament. LDP contenders may campaign on fiscally profligate pledges but pushing them through parliament will be difficult. Bottom line: we would fade undershoots in JPY and JGBs.

EUROZONE

EUR/USD is firm above 1.1700. Technically, EUR/USD needs to break above 1.1789 (July 24 high) and 1.1829 (July 1 high) to gain upside momentum. In the near-term, political uncertainty in France is a headwind for EUR.

The French government is on the verge of collapse. Prime Minister François Bayrou is facing a confidence vote today (between 8:00pm and 9:00pm local time) to secure backing for his fiscal policy that aims to tackle France’s fiscal woes. Bayrou is targeting €44 billion in spending cuts for 2026, freeze pensions/benefits/tax brackets, cap spending, and scarp two public holidays. Opposition parties from across the political spectrum have vowed to support toppling the government.

If Bayrou loses the upcoming vote of confidence, President Emmanuel Macron can either appoint a new prime minister that has the support of a fragmented parliament or call snap parliamentary elections. The political turmoil in France can further widen French OAT-German Bund yield spreads but it’s unlikely to weigh meaningfully on EUR as the situation remains country-specific and not systemic.

Moreover, underlying interest for long-term French bonds is encouraging. The bid-to-cover ratio on last week’s €11 billion auctions of French debt maturing in 10, 15 and 30-years was more than double the amount of bonds on offer.

CHINA

USD/CNH is holding above key support at 7.1200. China’s August trade data continues to point at weak domestic demand activity and decoupling with the US. In the twelve months to August, China’s trade surplus rose to a record $1165.8bn while the trade surplus with the US narrowed to $473bn in August, the lowest since January 2021. In August, both exports and imports growth fell short of expectations. Exports increased 4.4% y/y (consensus: 5.5%) vs. 7.2% in July and imports rose 1.3% y/y (consensus: 3.4%) vs. 4.1% in July. Softer import growth underscores persistently weak domestic demand.

In our view, a gradual revaluation of China’s currency could help China stimulate consumer spending by boosting disposable income through cheaper imports. Bottom line: USD/CNH has room to break lower.