Forex News

• GBP/JPY rebounds as broad-based Japanese Yen weakness drives the cross higher.
• The wide UK-Japan interest-rate gap keeps the British Pound favoured against the Yen.
• Traders stay alert to intervention risk as USD/JPY approaches the psychological 160 mark.

GBP/JPY rebounds on Thursday, supported mainly by broad-based weakness in the Japanese Yen (JPY) rather than strength in the British Pound (GBP), as traders assess the monetary policy outlooks of the Bank of Japan (BoJ) and the Bank of England (BoE). At the time of writing, the cross trades around 210, recovering from an intraday low of 208.78.

While the BoJ is gradually raising borrowing costs, the inflationary impact of the Middle East war is keeping other central banks hawkish, keeping Japan’s interest-rate gap wide and weighing on the Yen.

The BoJ raised its policy rate by 25 basis points (bps) to 1.25% at its September meeting. However, traders viewed the decision as slightly dovish as two policymakers voted to keep borrowing costs unchanged. Elevated Oil prices also increase Japan’s import costs, while broader fiscal concerns create another drag on the Yen. Traders will keep a close eye on the risk of intervention by Japanese authorities as USD/JPY climbs back toward the psychological 160.00 mark.

The BoE has stayed on hold so far this year, leaving its benchmark rate unchanged at 3.75% for a sixth straight meeting last week. Still, the 2.50% rate gap between the United Kingdom (UK) and Japan keeps the British Pound favoured against the Yen. Traders also keep the possibility of a BoE rate hike on the table as inflation risks stay tilted to the upside.

Comments from BoE officials on Thursday highlighted differing views within the central bank. Swati Dhingra said, “Financial conditions have done a lot of tightening work already in the UK,” adding, “We are not seeing broad-based price rises like those that happened in 2022.” She also noted that “winter energy prices will be critical for second-round effects.”

Deputy Governor Clare Lombardelli offered a more hawkish view, saying, “Wage growth remains too high to be consistent with inflation target.” She added, “Policy is increasingly likely to need to tighten if elevated energy prices persist, absent clear evidence of disinflation or weaker activity,” and warned that the “case for a hike grows the longer the conflict persists.”

For now, the wide interest-rate gap keeps GBP/JPY supported, but with USD/JPY grinding back toward 160, traders will stay alert to the risk of intervention by Japanese authorities.

TD Securities’ Macro Research team, led by Prashant Newnaha and Howard Du, expects the Reserve Bank of Australia to raise the cash rate by 25bps to 4.60% at the September meeting. They see the case to hike as clear, driven by upside surprises in CPI, firmer GDP, oil prices and AI-related demand, but forecast no further RBA hikes in November or December.

Clear case for September tightening

"TD expects the RBA to hike the target cash rate 25bps to 4.60% at its September Board meeting."

"The upside surprise in the July CPI release on 26 August forced us to seriously consider changing our call for a 25bps September hike, but we formalized the shift a week later following the firmer Q2 GDP release on 2 September."

"Looking beyond the September meeting, the Bank is likely to reinforce the possibility that it may need to tighten policy again."

"However, we do not see a pressing case for the RBA to deliver a follow-up hike either at its November or December meetings to 4.85% for the following reasons:"

"We view pre-emptive tightening as inflation risk management and the impact of the prior 3 hikes are still to flow through."

"The RBA could justify a pre-emptive Sep hike as being a sufficient response to the likely upside Q3'26 CPI outcome."

"The US and Iran have confirmed they are in talks to end their ongoing conflict. Progress should take the pressure off oil prices."

"The RBA Governor detailed the forward-looking employment indicators "...are all looking stable-ish" in her testimony to the House of Representatives Standing Committee on Economics."

"In the instance the Board is not unanimous in its decision to hike, the market will likely view a higher bar for a follow-up hike."

"While we forecast the RBA keeping the cash rate on hold at 4.60% for all of 2027, we acknowledge there is the possibility of the Bank being drawn to the hiking table again at its February 2027 meeting."

"To reiterate, a February 2027 hike is not our central forecast. However, we are flagging these items worth monitoring to justify a possible change of call for 2027."

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

Nordea’s Kjetil Olsen notes that Norges Bank raised its policy rate by 25bp to 4.5% and lifted the policy rate path, implying some risk of a further hike over the next six months. Norges Bank expects mainland growth to remain around 1% and unemployment to edge higher, while Olsen sees rates staying near current levels for an extended period and only declining gradually thereafter.

Central bank signals prolonged tight stance

"Norges Bank raised its policy rate by 25bps to 4.5% as we expected and signals a 40% chance of another hike over the next half year."

"They do not forecast rate cuts before 2028."

"Norges Bank expects growth to be around 1% going forward, slightly below potential, and that unemploment will edge up."

"They do not think the inflation outlook has changed much since June despite inflation having been lower during summer and NOK is somewhat stronger, pointing to stronger external impulses (energy, commodity prices)."

"Rates will stay around current levels for quite some time and when rates eventually goes down, they will not go down by much."

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

Rachel Battaglia at Royal Bank of Canada (RBC) argues that higher backward-looking population growth implies stronger potential output, mechanically reducing pressure on the Bank of Canada (BoC) to hike rates. Yet she notes policymakers are increasingly focused on energy price risks, and with key slack indicators like unemployment and business surveys unaffected by demographic revisions, the October policy meeting remains a difficult call.

Revised potential GDP meets energy risks

"From the Bank of Canada’s perspective as policymakers consider interest rate hikes, higher backward looking population growth estimates imply the economy’s production potential was stronger than previously thought (all else qual, such as productivity estimates)."

"But other real-time indicators of slack in the economy like business survey responses on excess capacity, the unemployment rate, and core inflation trends are all unimpacted by changes in population estimates."

"The BoC will be closely monitoring these indicators ahead of their next policy decision in October."

"On the surface, mechanical upward adjustments to potential GDP via revised population estimates, would reduce urgency to hike rates, but with the BoC increasingly focused on “risks” from energy prices it makes the October meeting a difficult decision."

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

• The Indian Rupee declines further against the US Dollar due to multiple headwinds.
• A rebound in Oil prices and surging US Treasury Yields weighs on the Indian currency.
• US S&P Global PMI unexpectedly expands at a faster pace in September.

The Indian Rupee (INR) extends its losses against the US Dollar (USD) on Thursday. The USD/INR pair jumps to near 95.96 at the time of writing as the Indian currency comes under pressure, with Oil prices regaining ground and rising United States (US) Treasury Yields due to solid Federal Reserve (Fed) interest rate hike expectations.

As of writing, the MCX Crude Oil contract expiring on October 19 is up 1% at around Rs. 8,900 after recovering early losses. The Oil price bounced back after posting a fresh two-week low near Rs. 8,496. Meanwhile, 10-year US Treasury Yields have posted a fresh 19-year high at 5.14%.

Oil prices bounce back as Iran vows not to surrender to US

Oil prices draw support from Iranian President Masoud Pezeshkian’s speech at the United Nations (US) General Assembly on Wednesday, where he vowed that the Islamic Republic will not surrender to the United States (US).

“They have tested the strength and the steadfastness of Iran and they have learned that Iran cannot be made to surrender,” Iranian President Pezeshkian said.

The statement from the Iranian President came after US President Donald Trump said that Washington has mainly two options: either to make a deal with Iran or annihilate the nation, while pushing back hopes of a deal after Mid-term elections.

Higher Oil prices bode poorly for currencies from economies, such as India, which rely heavily on oil imports to meet their energy needs.

Global PMI surge reinforces Fed hawkish tone

Analysts at MUFG/BTMU highlight that the latest survey data have added to the hawkish policy backdrop, noting that “both the Services and Manufacturing PMI for September surged, which will encourage the Fed to maintain the current hawkish rhetoric.” They stress that the momentum is not confined to the US, with “the data stronger than expected in Europe as well.” In a sign of broad-based expansion, MUFG/BTMU point out that “the Global Composite PMI increased to 58.4 in September, the highest level since July 2021,” underscoring the strength of global activity that is feeding into firmer yields and ongoing support for the Dollar.

Strategists at Deutsche Bank underline how quickly market expectations have shifted, noting that “this hawkish repricing was clear over the last 24 hours,” with pricing for a Fed move in October jumping sharply. They highlight that the probability of an October hike “rose from 53% on Tuesday, to 69% by last night’s close,” underscoring the speed and intensity of the adjustment in rate expectations.

Surging US Treasury Yields due to hawish Fed narrative have also strengthened the US Dollar. At press time, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades firmly near the eight-week high of 101.23.

Technical Analysis: USD/INR inches closer to 96.00

In the daily chart, USD/INR trades at 95.96. The pair holds above the 20-period exponential moving average (EMA) at 95.58, keeping the near-term bias bullish as price extends its recovery from last week’s lows. Momentum supports the constructive tone, with the Relative Strength Index (RSI) at 60.86, staying in positive territory but still shy of overbought conditions.

On the downside, immediate support is seen at the 20-period EMA at 95.58, which reinforces the bullish backdrop while it holds. Looking up, the immediate hurdle for the pair is the September 17 high at 96.10. The odds of the pair revisiting the all-time high near 97.00 would accelerate if it manages a decisive break above 96.10.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

• USD/CAD rallies beyond 1.4100 and approaches late-July highs at the 1.4130 level.
• Surging US yields and Fed tightening bets are proppelling the US Dollar across the board.
• The rebound in Crude Oil prices has failed to provide any significant support to the CAD.

The Canadian Dollar (CAD) extends losses for the fourth consecutive day against the US Dollar (USD) on Thursday, as surging US Treasury yields and rising bets of Federal Reserve (Fed) rate hikes are propelling the Greenback across the board. The USD/CAD pair has reached levels above 1.4100 for the first time in two months and is nearing the late July highs, in the 1.4130 area.

Moderate risk aversion is driving markets on Thursday as US Treasury yields surge to their highest levels in more than 20 years, threatening to push borrowing costs for mortgages, credit cards and corporate loans, ultimately adding strain on economic growth.

These fears are offsetting the positive impact on the CAD of the rebound in Oil prices, Canada’s main import. Crude Oil shows a significant recovery from Wednesday’s lows, with the barrel of Brent Oil returning to the key $100 level, as US and Iran representatives failed to reach any relevant agreement at the United Nations (UN) General Assembly held in New York this week, which has curbed hopes of any imminent reopening of the critical Strait of Hormuz.

US yields extend gains as PMI shock fuels questions over Fed positioning

Strategists at Societe Generale note that the “10y UST has crossed its 2023 peak (5.02%), resulting in an extension of the uptrend.” They acknowledge that “the move appears somewhat stretched,” but stress that “signals of a meaningful pullback are not yet visible.”

The bank adds that the latest “PMI was an accelerator for the leap in 2s to 4.94% (Fed behind the curve?) and 10s to 5.09%,” with the data “most likely” coinciding with or triggering “a sell/ stop loss order,” a move that was “exacerbated potentially by concession before the 5y UST auction.”

US data released on Wednesday revealed that business activity grew at its strongest pace in more than five years, with jobs and wages rising fast and input prices surging amid higher energy costs. This has heightened concerns that the US economy might be overheating, which strengthens the case for further Fed tightening over the coming months.

Later on Thursday, the focus will shift to Canada's Retail Sales data for July, which is expected to show a 0.8% decline, largely reversing the 0.6% growth seen in June. In the US, investors will pay attention to the weekly Initial Jobless Claims figures to confirm signals of a tighter labour market shown by Wednesday's PMI report. Later on, Philadelphia Fed President Anna Paulson and Cleveland Fed President Beth Hammack are likely to provide further insight into the banks' immediate policy plans.