Forex News

• USD/JPY falls toward 161.80 on Friday, down 0.37% on the day.
• The Japanese government wants to encourage pension funds to increase investments in domestic assets.
• Easing expectations for a Federal Reserve rate hike are weighing on the US Dollar.

USD/JPY falls toward 161.80 on Friday, down 0.37% at the time of writing, as the Japanese Yen (JPY) benefits from an unexpected shift in the Japanese government's stance on domestic asset allocation. The Japanese currency is also supported by a modest pullback in the US Dollar (USD) as markets scale back expectations for further monetary tightening in the United States (US).

The move was triggered after Japan's Finance Minister Satsuki Katayama said the government intends to encourage households and the Government Pension Investment Fund to increase their investments in Japanese financial assets significantly. She also stated that authorities expect interest rates to rise gradually and want to accelerate discussions on expanding Japanese government bond products aimed at households.

These developments have strengthened expectations of a gradual repatriation of capital toward domestic assets while reinforcing speculation that the Bank of Japan (BoJ) will continue to normalize monetary policy. The announcement has also revived intervention concerns in the foreign exchange market, encouraging an aggressive short-covering move in the Japanese Yen.

According to MUFG analyst Derek Halpenny, the announcement came as a surprise and explains the sharp reaction across the Japanese Yen, Japanese government bonds and equities. However, he believes these policy changes will take time to produce meaningful effects, adding that confidence in the BoJ remains essential before institutional investors significantly reduce overseas investments in favor of Japanese government bonds.

The US Dollar is also under pressure as expectations for additional Federal Reserve (Fed) rate hikes continue to ease. Fed of New York President John Williams said on Thursday that he does not expect a sustained rise in energy prices despite the renewed tensions in the Middle East. According to the CME FedWatch tool, markets now assign a 26.2% chance to a 25-basis-point rate hike in July, while the odds of a September hike hold at 50.0%.

Meanwhile, geopolitical developments remain in focus after Qatar launched a new mediation effort with Iran aimed at easing tensions surrounding the Strait of Hormuz. According to Reuters, the talks are being coordinated with the United States and focus on implementing the US-Iran memorandum of understanding as well as resolving disputes over navigation through the strategic waterway. However, US President Donald Trump stated that the ceasefire is now over, highlighting that geopolitical risks remain elevated despite ongoing diplomatic efforts.

OCBC strategists Christopher Wong and Sim Moh Siong note that the European Central Bank's (ECB) June minutes justified the latest rate hike while keeping flexibility on future moves. Since then, Oil prices have fallen sharply and June Consumer Price Index (CPI) surprised on the downside. Their base case remains for one final ECB rate hike in September, though President Lagarde’s comments in Sintra raise the risk that June was a one‑and‑done move.

ECB weighs final hike versus pause

"The ECB’s June meeting minutes reinforced the Governing Council’s view that the June rate hike was fully justified based on the information available at the time, while maintaining flexibility on future policy moves."

"Since the 11 June meeting, oil prices have fallen sharply and June CPI data surprised on the downside."

"Our base case remains for one final ECB rate hike in September, although ECB President Lagarde’s comments in Sintra have increased the possibility that June marked a "one-and-done" move."

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

DBS economists Radhika Rao and Mo Ji project China’s Gross Domestic Product (GDP) growth to slow from 5.0% year-on-year in Q1 to 4.8% in Q2. They note resilient industrial production and strong export growth driven by AI-related electronics, but highlight weak retail sales, subdued household sentiment, and continued drag from declining property prices and falling fixed asset investment.

AI exports offset weak consumption

"Economic growth is expected to decelerate from 5.0% yoy in Q1 to 4.8% in Q2, amid uneven domestic momentum."

"Industrial production is expected to improve from 4.5% in April to 4.6% in June, amid resilient external demand."

"Exports growth should have maintained its momentum with growth of 20.4% in June, driven by regional AI-electronic demand."

"However, retail sales growth is projected to moderate to 0.5% in June 2026, partly due to a high base effect from last year's trade-in subsidy programs."

"Meanwhile, declining property prices continue to weigh on household wealth, suggesting consumption is likely to stay subdued in the near term."

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

Royal Bank of Canada (RBC) economist Nathan Janzen notes that Canadian labour markets showed further signs of stabilisation in June, following a stronger improvement in May. Employment rose modestly, while per-worker conditions improved and the unemployment rate edged down to 6.5%. Janzen highlights softer population growth, firmer economic data and lower U.S. tariff rates as supporting factors, and expects further unemployment declines later in 2026.

Labour data supports gradual recovery view

"Canadian labour markets showed further signs of steadying in June after a larger improvement in May."

"The employment increase itself in June (+18k) left the measure still down 6k on net for the year."

"But we continue to think that slower employment gains should be expected given a sharp slowing in Canadian population growth."

"Critically, controlling for changes in the demographic backdrop, per-worker labour market conditions held onto a larger-than-expected improvement in May with the unemployment rate edging down to 6.5% in June from 6.6% the prior month, led by a pullback in the youth unemployment rate on an improved summer job market."

"Against that backdrop, the June labour market data is broadly consistent with our own base-case that Canada's economy is broadly still improving on a per-person and per-worker basis and we continue to look for the unemployment rate to edge down further over the second half of the year."

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

ING economists Deepali Bhargava and Lynn Song project India’s consumer inflation to edge up to 4.2% year-on-year in June, while wholesale inflation moderates to 9%. They highlight that lower Brent prices should ease wholesale costs, but persistent retail fuel prices, firmer food inflation and sticky core pressures keep overall inflation risks tilted to the upside over the coming months.

Wholesale easing, consumer prices stay sticky

"We expect India’s consumer price inflation to edge slightly higher to 4.2% year-on-year in June, while wholesale price inflation is likely to moderate to 9%."

"Softer Brent crude prices should pull wholesale prices lower, but persistent retail fuel costs, gradually firming food inflation and sticky core pressures point to a mild uptick in consumer inflation."

"The gradual pass-through of wholesale prices to retail prices, meanwhile, is expected to support underlying inflation pressures."

"Overall, inflation risks remain tilted to the upside, as El Niño-related weather disruptions threaten food costs."

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

• The Canadian Dollar strengthens after Canada's June employment report beats expectations.
• USD/CAD heads for its first weekly loss in six weeks.
• Next week's US inflation data could shape expectations for the Fed's interest rate path.

The Canadian Dollar (CAD) strengthens against the US Dollar (USD) on Friday after stronger-than-expected Canadian employment data. At the time of writing, USD/CAD is trading around 1.4160 after falling to a more than two-week low of 1.4136.

Statistics Canada reported that the economy added 18.2K jobs in June, exceeding market expectations of 10K. However, the reading was sharply lower than the 87.8K increase recorded in May. The Unemployment Rate eased to 6.5% from 6.6%.

As labor market conditions remain uneven, the Bank of Canada (BoC) is likely to maintain a wait-and-see approach, with policymakers expected to leave interest rates unchanged in the coming months while monitoring inflation risks, particularly those stemming from higher energy prices.

Energy-driven inflation risks are back in focus after Oil prices rose earlier this week following renewed hostilities in the Middle East. Higher crude lifted the commodity-linked Canadian Dollar, putting USD/CAD on track for its first weekly loss in six weeks.

However, Oil prices are paring earlier gains as diplomatic efforts to de-escalate tensions in the Middle East continue. Reuters reported that Qatari mediators are in Iran for talks aimed at creating conditions for broader negotiations.

Meanwhile, the US Dollar remains firm as traders reassess developments in the Middle East, while expectations of a Federal Reserve (Fed) interest rate hike later this year continue to underpin the Greenback, limiting further downside in USD/CAD.

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, is trading around 100.90 after rebounding from an intraday low of 100.60.

Traders now await next week's US Consumer Price Index (CPI) data, due on Tuesday, for fresh clues on the Fed's monetary policy path.

Societe Generale analysts Dev Ashish and Brendan McKenna note that Mexico’s June inflation data surprised to the downside, with headline and core measures moving close to Banxico’s target range. They argue that weak economic activity is weighing on services and core goods prices, reinforcing disinflation. The softer inflation profile strengthens the case for a more dovish Banxico stance, though the policy rate is still expected to stay at 6.50% near term.

Disinflation bolsters easing expectations

"June inflation surprised decisively to the downside, with headline CPI falling to 3.37% yoy and core inflation to 4.03% yoy. More importantly, the second bi-weekly reading showed headline at 3.18% yoy and core at 3.94% yoy, bringing both measures close to or within Banxico’s target range and providing the strongest evidence yet that underlying inflation pressures are easing."

"Services (excluding housing and education) inflation is finally moderating, falling to 4.40%, while core goods inflation eased to 3.45%. This suggests that weak economic activity is beginning to weigh on domestic pricing power, supporting Banxico’s long-held expectation that demand weakness would eventually drive disinflation."

"Non-core inflation remains highly supportive, with falling prices of seasonal food items and livestock likely to push headline inflation even lower through July-August. We would not rule out some bi-weekly headline readings temporarily falling below Banxico’s 3.0% target."

"We now expect headline inflation to end 2026 at 3.69% yoy and 3.62% yoy in 2027, while core inflation moderates to around 3.46% next year. Future disinflation should increasingly be driven by core components, particularly services."

"The data strengthen the case for a more dovish Banxico, but not necessarily for immediate rate cuts. We retain our call for the policy rate to remain at 6.50%, though we now see a 40% probability of a 3Q26 cut and a potential 50bp easing cycle by 1H27 if inflation continues to surprise lower and the growth backdrop remains weak."

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

• Qatari negotiators are holding talks with Iranian officials in an effort to reduce regional tensions.
• Discussions are being coordinated with the United States and aim to preserve broader diplomatic negotiations.
• The implementation of the US-Iran memorandum of understanding and navigation disputes in the Strait of Hormuz are at the center of the talks.

Qatar has dispatched negotiators to Iran for meetings with Iranian officials in a renewed diplomatic effort to de-escalate tensions and create conditions for broader negotiations to continue, according to a Reuters report citing a source familiar with the matter.

The discussions are being conducted in coordination with the United States and focus on preventing a further deterioration in relations after the recent escalation between Washington and Tehran.

According to Reuters, the talks are intended to address the implementation of the United States-Iran memorandum of understanding, as well as the issues that triggered the latest rise in tensions. Among the key topics under discussion are disputes over navigation in the Strait of Hormuz, a strategically important shipping route for global energy markets.

The diplomatic initiative could be closely watched by financial markets, as any progress toward easing tensions in the Gulf region may help reduce geopolitical risk premiums across energy markets and broader risk-sensitive assets.

Oil prices remain supported following the announcement, with West Texas Intermediate (WTI) trading around $72 at the time of writing on Friday, up 0.42% on the day.

• WTI US Oil prices are correcting despite persistent geopolitical risks in the Middle East.
• Qatar-led diplomatic efforts are fueling hopes of de-escalation between Washington and Tehran.
• Supply concerns remain supported by ongoing disruptions in the Strait of Hormuz and stronger Oil demand projections from the International Energy Agency.

West Texas Intermediate (WTI) Oil trades around $72 at the time of writing on Friday, up 0.42% on the day, but remains in a consolidation phase after reaching a more than two-week high earlier this week. Investors are assessing mixed signals from the Middle East, balancing ongoing military tensions against renewed diplomatic efforts.

Market sentiment improved slightly after a US official confirmed that technical talks with Iran remain ongoing despite US President Donald Trump's comments that the memorandum of understanding with Tehran was no longer in effect. Reuters also reported that Qatari negotiators are in Iran to meet with Iranian officials in an effort to de-escalate tensions and create conditions for broader negotiations to continue, in coordination with the United States (US). According to a source cited by Reuters, the talks are focused on implementing the US-Iran memorandum of understanding and addressing the disputes that triggered the recent escalation, including navigation issues in the Strait of Hormuz.

Despite the diplomatic progress, the geopolitical risk premium remains in place. Strikes between the United States and Iran continue, keeping concerns over potential energy supply disruptions alive. Meanwhile, Rabobank noted that Oil traffic through the Strait of Hormuz remains significantly below normal levels, while war risk insurance costs continue to rise, factors that could limit further downside in Oil prices.

On the fundamental side, the latest projections from the International Energy Agency (IEA) also provide support for the market. The agency expects global Oil demand to increase by 1.2 million barrels per day YoY in the fourth quarter. The IEA also forecasts a significant increase in global Oil supply this year if transit conditions improve, while lowering its outlook for Russian Oil production due to attacks on the country's energy infrastructure.

Investors also remain focused on the outlook for the Federal Reserve (Fed). Interest rates staying higher for longer could weigh on global economic growth and limit Oil demand, although developments in the Middle East continue to be the main driver of Oil prices in the near term.

OCBC strategists Christopher Wong and Sim Moh Siong note that the New Zealand Dollar (NZD) outperformed after stronger manufacturing data and hawkish Reserve Bank of New Zealand (RBNZ) commentary reinforced expectations for further tightening. They remain constructive on NZD but highlights that upside from yield support may be constrained near term. Markets are pricing the RBNZ as the most hawkish G10 central bank, with around 80bp of additional tightening by mid-2027.

NZD strength meets yield headwinds

"NZD outperformed after stronger-than-expected manufacturing data and hawkish RBNZ commentary strengthened expectations for further policy tightening. New Zealand's manufacturing PMI rose to 59.7 in June, its highest level since July 2021."

"We remain constructive on NZD. However, the scope for NZ yields to move materially higher in the near term may be limited until there is clearer evidence of stronger domestic growth and a more supportive energy backdrop."

"As a key driver of the currency, relative yield support could therefore become less compelling in the short run."

"The RBNZ is already the most hawkishly priced central bank in the G10. Markets are pricing around 80bp of additional tightening by mid-2027, taking the OCR to about 3.3%, broadly in line with the RBNZ's estimate of the neutral rate at 3.25%."

"Looking ahead, key data releases include New Zealand's 2Q26 CPI on 21 July and the 2Q26 employment report on 5 August."

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