Forex News

• USD/JPY extends its recovery from five-week lows as the Japanese Yen weakens.
• Improving risk sentiment reduces demand for the Yen, while the US Dollar regains strength.
• Traders brace for Fed and BoJ decisions, with both central banks expected to hold interest rates steady.

USD/JPY edges higher on Tuesday as last week’s AI-related worries subside, reducing the Japanese Yen’s (JPY) safe-haven appeal and helping the US Dollar (USD) resume its uptrend ahead of the Federal Reserve’s (Fed) monetary policy decision on Wednesday.

At the time of writing, the pair trades around 157.85 after slipping to 156.08 on Friday, its lowest level since September 18. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, rises to a two-week high around 102.23 after falling to 101.45 last week, its lowest level since October 1.

Analysts at OCBC note that while recent “AI concerns have eased,” the “JPY’s return as a portfolio hedge is worth watching.” They stress that “it is too early to call an AI bust,” arguing that investors will “increasingly demand stronger revenues and cash flow to justify higher capex,” but that “for now the jitters look more like noise than a sustained reversal.” In their view, “AI remains broadly USD-positive, but it is no longer a one-way USD trade.”

The Fed is expected to keep interest rates unchanged after raising them by 25 basis points (bps) in September to 3.75%-4.00%. This marked its first hike since 2023 as policymakers responded to inflation pressures fuelled by higher Oil prices amid the war in the Middle East.

With a pause widely expected, attention will centre on the policy statement and Chair Kevin Warsh’s press conference for signals on a December rate hike, which traders see an 80% chance of, according to the CME FedWatch Tool.

Data released on Tuesday offers modest support to the Greenback, with US Durable Goods Orders rising 1.8% in September, above expectations of 0.6%. However, orders excluding transportation increased 0.5%, slightly below the 0.6% forecast, while core capital goods orders slowed to 0.5% from 1.6%. Meanwhile, ADP’s four-week average of job gains eased to 16.8K from 17.5K.

Meanwhile, the Bank of Japan (BoJ) is also expected to keep interest rates unchanged at Friday’s meeting after delivering a cumulative 50 basis points (bps) of tightening earlier this year, with traders anticipating another hike in December.

Analysts at MUFG/BTMU argue that the Yen “may well struggle through this week,” with investors likely braced for BoJ Governor Ueda to adopt a more cautious tone on Friday given the global backdrop. They expect the BoJ to acknowledge that “more rate hikes are necessary,” but note that Ueda’s communication style suggests he “may not provide a strong message on a move in December that remains 80% priced.”

In MUFG/BTMU’s view, that combination of cautious guidance and already elevated expectations “could mean USD/JPY retraces further higher this week, especially if investor sentiment related to AI stabilises.”

Commerzbank FX analyst Michael Pfister reviews the recent sharp depreciation of the Mexican Peso (MXN) against the US Dollar (USD) and argues that the move looks overdone. He highlights Banxico’s dovish stance, USMCA trade uncertainties and rising risk aversion as key drivers. The bank’s forecasts see USD/MXN gradually declining from 17.20 in December 2026 to 16.50 by December 2027.

MXN-specific risks drive sharp selloff

"However, since the beginning of September, sentiment has shifted abruptly. Instead of trading below 17 USD/MXN, the exchange rate is now trading above 18.5, representing a depreciation of over 9%. At first glance, this could be attributed to general US dollar strength or increased risk aversion."

"The minutes from the last meeting made it clear that Banxico is open to further interest rate cuts, contrary to market expectations, and that Fed rate hikes do not have to be mechanically mirrored. This amounts to a very dovish stance, which is causing the peso’s carry advantage to decline further."

"Consequently, the authorities are unlikely to stand by and watch indefinitely, but will at some point signal their readiness to tighten monetary policy, which would support the peso quickly."

"The outlook is more challenging when it comes to two other potential contributing factors. The USMCA negotiations do not currently appear to be a top priority for the US, and it is quite possible that no agreement will be reached by the end of the year, or even until 2027. A weaker US dollar would also help, but this is currently difficult to predict given the geopolitical risks."

"However, there is a glimmer of hope: the peso’s weakness is likely to be limited as most of the risks are probably already factored in by now."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

United Overseas Bank’s (UOB) Quek Ser Leang and Lee Sue Ann report that GBP/USD broke below prior support at 1.3340, with intraday downside momentum modest but sufficient to keep price action constrained between 1.3315 and 1.3365. On a 1–3 week view, earlier bullish momentum has faded and the pair is now seen in a range-trading phase between 1.3290 and 1.3390, while longer-term analysis still flags scope for rebounds toward 1.3480.

Bullish bias fades into a range

"24-HOUR VIEW: When GBP was at 1.3375 yesterday, we indicated that “the current price movements still appear to be part of a range-trading phase, likely between 1.3355 and 1.3400.” We were incorrect, as GBP fell and broke below 1.3355, reaching a low of 1.3326. Downward momentum has increased, albeit not significantly. Today, GBP could weaken, but based on the prevailing momentum, it should stay within a 1.3315/1.3365 range."

"1-3 WEEKS VIEW: We turned positive on GBP in the middle of the month. In our most recent narrative from last Wednesday (21 Oct, spot at 1.3375), we highlighted that “there is scope for GBP to rise to 1.3440 next.” Yesterday, GBP fell and broke below our ‘strong support’ level at 1.3340 (low has been 1.3326). Upward momentum has faded, and GBP has likely entered a range-trading phase. For the time being, we expect GBP to trade between 1.3290 and 1.3390."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

National Bank of Canada (NBC) economists Taylor Schleich and Ethan Currie argue that economic slack and contained core inflation have allowed the Bank of Canada to be patient, but sustained high Oil prices and a firmer growth backdrop now point to a rate hike. They expect a first increase since July 2023, with December odds near 50%.

BoC patience challenged by Oil

"Economic slack and contained core inflation has allowed the BoC to take a patient approach this year. But as officials have repeatedly stressed, the longer energy prices remain elevated, the greater the risk that inflation broadens. The Governor was clearly uncomfortable with WTI at ~$90/bbl in early September, so another 10-20% increase in the interim has likely exhausted their patience. "

"While trade uncertainty may be weighing on the growth outlook, the BoC has faded these risks lately. Macklem has stressed that the economy is on better footing, firms are adapting, and more recently, he’s drawn attention to the positive economic benefits that higher oil prices are providing. A reportedly imminent trade deal should also assuage some lingering concern. "

"This all leans toward the BoC delivering its first increase since July 2023."

"Assuming the Bank does opt to tighten, the focus will shift to the timing of the next one. Supporting a consecutive move in December will be upgraded inflation and growth projections in a new MPR and an empirical record that sees the Bank typically begin its cycles with back-to-back hikes."

"However, other central banks have opted (the ECB) or are likely to opt (the Fed) for a more gradual approach. We don’t see this being a ‘dovish hike’ whereby the Bank sets up a December hold. However, they also won’t explicitly ‘tee up’ a follow-on move. Instead, they’ll frame the outcome of future decisions around incoming data and the evolving balance of risks."

"That’s likely to see markets place the odds of a December hike around 50% following the decision"

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)