Forex News
Rabobank discusses Japanese Yen dynamics around Japan’s high debt-to-GDP ratio, fiscal credibility and the BoJ’s gradual policy normalization. The report argues that a more hawkish BoJ and reassurance over fiscal policy may be needed for a sustained JPY recovery, while forecasting USD/JPY at 159 on a three-month horizon.
BoJ normalization and fiscal anxiety
"Before the bursting of Japan’s asset bubble burst in 1990, the country’s debt GDP ratio was positioned roughly in the middle of the range of all G7 nations. In the thirty years that followed, stagnating GDP combined with high levels of fiscal spending aimed at promoting growth elevated the debt GDP ratio to levels well above the G7 average. For years, Japan’s heightened debt GDP ratio was spoken about in the FX market as a potential issue for future governments and taxpayers, but it was not an issue that was persistently front of mind for the FX market."
"Japan’s exit from the deflation years has allowed the BoJ to move back from extraordinary monetary policy measures. In response to higher inflation, policy rates have been hiked but at a slow and cautious pace. Japan has been one of five G10 central banks to hike rates this year, meaning that it has been difficult for short-term interest differentials to move in the JPY’s advantage."
"Looking ahead, a recovery in real wages, resilience in business confidence and cautious optimism regarding Japan’s economic outlook suggest that the BoJ is on track to hike again this year. That said, an accelerated pace of BoJ rate hikes in addition to reassurances about fiscal policy may both be necessary before USD/JPY turns lower."
"We remain of the view that reassurances on Japan’s fiscal situation combined with a hawkish BoJ are necessary requirements for any turnaround in the value of the JPY."
"Our forecast of a move back to USD/JPY159 on a 3-month view assumes a hawkish BoJ."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
Deutsche Bank’s Early Morning Reid describes a broad slump in global equities driven by renewed doubts over the AI trade. The S&P 500 fell 0.51% with futures down further, while the Nikkei, CSI 300 and Hang Seng posted sharp declines. The semiconductor index is nearing bear-market territory, while mega-cap technology stocks are also coming under renewed pressure.
AI and chips drag global stocks
"As we go to press this morning, global equities are continuing to slump, as fresh doubts about the AI trade have driven a pronounced selloff in tech stocks. Indeed, the S&P 500 fell -0.51% yesterday, and this morning futures are down another -0.78%."
"Before the slump accelerated overnight, US equities had already seen a rough session yesterday thanks to the fresh slide in chip stocks. In fact, the Philly semiconductor index (-4.29%) hit an 8-week low, having now shed -18.91% from its peak less than a month ago. So that now leaves it close to the -20% mark that would mark a technical start of a bear market, which is a big turnaround from Q2, when it posted its best quarterly performance since the index began in the early 1990s. "
"The AI-related tech pullback wasn’t limited to chipmakers either, with a decline for the Mag-7 (-1.27%) led by a slide in Alphabet’s shares (-4.44%) after Bloomberg reported a months-long delay for its new Gemini 3.5 Pro AI model. So that tech decline dragged on the S&P 500 (-0.51%), which fell even as nearly three-quarters of its constituents advanced on the day"
"There wasn’t a single catalyst behind the selloff, but we had TSMC’s earnings shortly after we went to press yesterday, and their share price is down -5.26% this morning after they said that capital expenditure would be higher than previously forecast. Meanwhile, Netflix’s earnings disappointed after the close last night, pushing their shares almost -9% lower in after-hours trading."
"Moreover, there’s no sign of any letup this morning in Asia, with very sharp declines for the Nikkei (-4.81%), the CSI 300 (-2.45%), the Hang Seng (-1.98%) and the Shanghai Comp (-1.64%), whilst the KOSPI is closed for a public holiday. Indeed, that slide indicates the Nikkei is currently likely on course for its worst day since March, and also leaves the index on track for technical correction territory, having now shed over 12% since its peak less than a month ago."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
- EUR/CAD may face pressure as expected softer Eurozone inflation data may strengthen odds for a less restrictive ECB policy stance.
- The ECB will likely hold rates next Thursday but could hike in September over energy risks.
- Escalating US-Iran tensions and reported regional explosions threaten Middle East supply, potentially supporting the Canadian Dollar.
EUR/CAD remains flat after experiencing volatility, trading around 1.6070 during the early European hours on Friday. The currency cross may experience downward pressure due to potential weakness in the Euro (EUR). Expected softer Eurozone inflation data could strengthen the case for a less restrictive policy stance from the European Central Bank (ECB). Specifically, while the Eurozone Core Harmonized Index of Consumer Prices (HICP) inflation is projected to hold steady at 2.4% year-over-year and 0.2% month-over-month, the headline HICP is forecast to decline by 0.1% on the month.
According to reports from Reuters, the ECB is widely expected to keep interest rates unchanged next Thursday. However, policymakers are anticipated to implement a second-rate hike of the year in September. This potential shift is driven by a renewed surge in energy prices, which heightens the risk of more intense, long-term inflationary pressures across the region.
The EUR/CAD cross may further depreciate as the commodity-linked Canadian Dollar remains stronger on expectations that oil markets will soon regain their footing. Escalating military tensions and direct attacks between the United States and Iran have heavily intensified concerns over potential supply disruptions in the Middle East.
These energy supply anxieties spiked further following a Reuters report indicating that Iran has instructed Yemen’s Houthi militia to block the critical Red Sea shipping route if the U.S. strikes Iranian power infrastructure. Adding to the geopolitical volatility, Iran's Tasnim news agency reported explosions in Bandar Abbas, Qeshm, and Ahvaz, with separate blasts reportedly heard as far away as Kuwait and Basra.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
United Overseas Bank (UOB) strategists Quek Ser Leang and Lee Sue Ann note GBP/USD has corrected sharply from recent highs near 1.3556 but now looks set to consolidate between 1.3450 and 1.3520 intraday. The 1–3 week outlook still sees renewed upward momentum, with 1.3590 as a key level to monitor, while a break below 1.3450 would point to a period of consolidation before any further gains.
Pound steadies after sharp retreat
"24-HOUR VIEW: Two days ago, GBP surged to a high of 1.3556. Yesterday, when GBP was at 1.3540, we indicated the following: “The sharp rally appears excessive, but with no sign of pause yet, GBP could continue to rise. However, given the deeply overbought conditions, any advance could be limited to a test of 1.3560.” Our assessment turned out to be incorrect, as GBP did not test 1.3560. Instead, it retreated sharply to a low of 1.3460 before closing 0.43% lower at 1.3480. The sharp pullback has stabilised somewhat, and instead of continuing to decline today, GBP is more likely to trade in a range between 1.3450 and 1.3520."
"1-3 WEEKS VIEW: After GBP surged on Wednesday, we indicated yesterday (16 Jul, spot at 1.3540) that “the renewed upward momentum suggests that GBP has resumed its advance.” We also highlighted that “the level to monitor is 1.3590.” We did not expect GBP to pull back sharply to 1.3460. Upward momentum has eased somewhat, and a breach of 1.3450 (no change in ‘strong support’ level) would suggest that GBP could consolidate first before pushing higher."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
(The story was corrected on July 17 at 08:25 GMT to correct author name as "United Overseas Bank (UOB) strategists Quek Ser Leang and Lee Sue Ann", not Christopher Wong)
- NZD/USD declines to near 0.5840 in Friday’s early European session.
- The US launched a fresh wave of attacks on Iran, boosting a safe-haven currency such as the US Dollar.
- RBNZ’s Conway signaled further tightening as conflict lifts inflation risk.
The NZD/USD pair edges lower to around 0.5840 during the early European session on Friday. The New Zealand Dollar (NZD) weakens against the US Dollar (USD) as escalating tensions in the Middle East trigger risk-off sentiment, weighing on the riskier assets. Traders await the preliminary reading of the Michigan Consumer Sentiment Index for July later on Friday.
The US has carried out major strikes on Iran for the sixth day in a row. Officials in southern Iran’s Bandar Abbas reported that civilian infrastructure, including power facilities and a train station, has been hit.
Meanwhile, the Iranian Islamic Revolutionary Guards Corps (IRGC) said that no oil or gas will be exported through the Strait of Hormuz as long as US attacks continue, per Tasnim news agency. The IRGC said that it launched an attack on the US command center in Syria's Al-Tanf. The Iranian military further stated that it targeted US maritime surveillance radar in Oman.
Escalating conflict between the US and Iran could boost safe-haven flows, supporting the Greenback and creating a headwind for the pair in the near term.
A hawkish tone from the Reserve Bank of New Zealand (RBNZ) could help limit the Kiwi’s losses. Last week, the RBNZ decided to raise its Official Cash Rate (OCR) by 25 basis points (bps) to 2.50% and hinted that further interest rate hikes may be necessary due to risks of persistent and sticky inflation.
RBNZ chief economist Conway said earlier this week that the Middle East conflict has complicated monetary policy in the same way all supply shocks do. He added that developments in the Middle East over the past week point to upside risks to the RBNZ's September quarter forecast.
New Zealand Dollar FAQs
The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is broadly determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique particularities that also can make NZD move. The performance of the Chinese economy tends to move the Kiwi because China is New Zealand’s biggest trading partner. Bad news for the Chinese economy likely means less New Zealand exports to the country, hitting the economy and thus its currency. Another factor moving NZD is dairy prices as the dairy industry is New Zealand’s main export. High dairy prices boost export income, contributing positively to the economy and thus to the NZD.
The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate between 1% and 3% over the medium term, with a focus to keep it near the 2% mid-point. To this end, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will increase interest rates to cool the economy, but the move will also make bond yields higher, increasing investors’ appeal to invest in the country and thus boosting NZD. On the contrary, lower interest rates tend to weaken NZD. The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.
Macroeconomic data releases in New Zealand are key to assess the state of the economy and can impact the New Zealand Dollar’s (NZD) valuation. A strong economy, based on high economic growth, low unemployment and high confidence is good for NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, NZD is likely to depreciate.
The New Zealand Dollar (NZD) tends to strengthen during risk-on periods, or when investors perceive that broader market risks are low and are optimistic about growth. This tends to lead to a more favorable outlook for commodities and so-called ‘commodity currencies’ such as the Kiwi. Conversely, NZD tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
- AUD/USD edges lower to near 0.6990 as the US Dollar gains slightly higher.
- The US Dollar rises amid fears of a resurgence in US inflation.
- Iran threatens to close the Red Sea if the US attacks Iranian infrastructure.
The Australian Dollar (AUD) trades marginally lower against the US Dollar (USD) at around 0.6990 during the European trading session on Friday. The Aussie pair edges down as the US Dollar ticks higher amid fears that the United States (US) inflation could re-accelerate after slowing down in June.
At press time, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades 0.1% higher to near 100.80.
Fears of a resurgence in US inflation are prompted by elevated energy prices amid continued aggression in the Middle East. Above that, Iran has threatened to close the Red Sea if the United States (US) strikes Iranian infrastructure.
On Wednesday, US President Donald Trump threatened to attack Iranian bridges and power plants if Tehran doesn’t return to the table for negotiations.
On the Australian Dollar (AUD) front, investors await the employment data for June, which will be released next week.
AUD/USD technical analysis
AUD/USD trades slightly lower at around 0.6990, but maintains a mildly bullish near-term bias as spot remains above the 20-day exponential moving average (EMA) at 0.6969. The pair has recovered from late-May lows and is consolidating just over this dynamic floor, while the Relative Strength Index (RSI) at 51 suggests neutral-to-positive momentum without yet reaching overbought conditions.
On the downside, immediate support is provided by the 20-day EMA at 0.6969, followed by the July 14 low at 0.6913. Below 0.6913, the pair could slide to near the March 30 low at 0.6833. Looking up, the pair could extend its advance towards the June 18 high at 0.7042.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Commerzbank’s Volkmar Baur notes EUR/USD is struggling for clear direction as the Iran conflict, Oil prices, and diverging inflation dynamics cloud the outlook. He highlights a strong link between Oil and ECB rate expectations, while the Fed faces falling inflation and AI-driven productivity hopes. With upcoming ECB and Fed meetings, EUR/USD is seen staying in a sideways trend.
Cross stuck in confused sideways trade
"The euro side therefore seems to be looking to the oil price for guidance. At least that’s what the renewed strong correlation between the oil price and ECB interest rate expectations for December suggests. For the US dollar, however, things are even more complicated right now."
"The strength of the US dollar depends, at least in part, on its role as the world's leading currency and the world’s most important reserve currency. Part of the foundation of these functions is trust in the US and the US dollar. And that trust seems to be increasingly eroding."
"As we’ve mentioned before, this situation could very well persist for a while. The ECB and Fed meetings are scheduled for the next two weeks. However, we expect it will still be too early for the ECB to lock in another rate hike, while it’s likely too early for the Fed to adopt a more dovish tone just yet."
"EUR/USD could therefore remain stuck in a sideways trend for a little longer."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
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