Forex News

DBS Group Research strategist Chang Wei Liang notes that USD/JPY has surged above the mid-162 area as markets probe Japanese authorities’ tolerance for further Japanese Yen (JPY) weakness. He highlights that the absence of fresh, forceful rhetoric from officials is encouraging shorts, while the previous restraint from implicit intervention threats is fading, leaving the JPY potentially on a softer footing despite solid Tankan survey data.

Markets test Japanese Yen tolerance

"USD/JPY has surged above mid-162 levels, with markets testing the Japanese authorities’ tolerance for JPY weakness."

"USD/JPY has accelerated higher after breaking through 162 yesterday, given no new rhetoric to deter shorts by government officials."

"Finance Minister Katayama only said that Japan will take “appropriate action at any time as necessary” yesterday, which has been interpreted by traders as the JPY being somewhat distant from the intervention threshold."

"The previous restraint on JPY weakness from implicit intervention threats is receding, and the JPY could be on a softer footing without more forceful rhetoric."

"Meanwhile, Japan’s Tankan for Q2 released today indicated a solid rise in sentiment across large manufacturing firms (22 vs Q1:17), helped by an exports boom and easing oil prices."

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

OCBC’s Sim Moh Siong and Christopher Wong highlight that Fed Chair Kevin Warsh’s appearance at Sintra and upcoming United States (US) payrolls are key for the US Dollar (USD). They see low odds of new guidance but maintain a modestly bullish USD bias on hawkish Fed risks and stabilising labour data. Softer eurozone inflation reduces pressure on the ECB to tighten further near term.

Warsh and payrolls guide Dollar narrative

"Sintra is unlikely to deliver policy surprises, but Fed Chair Warsh’s tone on oil and labour market is key. Stable US labour data and hawkish Fed risks support modest USD upside, while softer eurozone inflation lowers pressure for near-term ECB tightening."

"Sintra Central Bank Watch: Fed Chair Warsh speaks at Sintra today, but expectations for fresh policy guidance are low after June’s FOMC press conference. The key will be his framing of recent Middle East developments and the drop in crude oil prices. Labour market signals also matter."

"The May JOLTS report supports the view that US labour conditions have stabilised after earlier softening. We retain a modest bullish bias on USD, underpinned by hawkish Fed risks."

"On the ECB side, a dovish shift from Lagarde at Sintra looks unlikely. However, softer eurozone inflation should reduce the urgency for near-term tightening following June’s hike."

"ECB officials continue to flag uncertainty around second-round effects, but several have indicated no pressing need to hike in July if energy markets remain stable."

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

HSBC analysts Willem Sels and Lucia Ku argue that concerns over mega IPOs and stretched valuations in US equities are offset by solid earnings growth across most S&P 500 sectors, driven by AI-related demand. They stress that positive earnings momentum is broadening beyond technology, and maintain an overweight stance on US equities, viewing short-term volatility as a buying opportunity.

AI cycle underpins US stocks

"While mega IPOs have been in the spotlight recently amid market concerns over elevated valuations and investors taking profits after the lock-up periods, we believe earnings growth for the majority of the S&P 500 remains supportive, and valuations are still reasonable by historical standards. Positive earnings momentum is spreading beyond IT and Communications, with Energy and Materials also benefitting from data centre construction required to support AI-led innovation."

"Consensus earnings growth forecasts for 2026 exceed 10% across most sectors (23% overall), except for Consumer Staples and Real Estate. The US is also less exposed to downside risks from the Middle East conflict."

"Given these positive drivers and our strong belief that the AI innovation cycle is here to stay, driving stronger demand for US assets, we remain overweight on US equities and are more bullish on the USD. We would view any short-term market volatility as a buying opportunity while remaining diversified with quality bonds, gold and alternative assets."

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

• EUR/GBP falls to its lowest level since July 2025 after Eurozone inflation misses forecasts.
• Headline and core inflation both slowed in June, weighing on ECB rate-hike expectations.
• Traders also monitor UK political developments and the BoE's monetary policy outlook.

The Euro (EUR) falls against the British Pound (GBP) on Wednesday after softer-than-expected Eurozone inflation data reduced expectations for another European Central Bank (ECB) interest rate increase this year.

At the time of writing, EUR/GBP trades around 0.8598, its lowest level since July 2025.

Traders await speeches from ECB President Christine Lagarde and Bank of England (BoE) Governor Andrew Bailey at the ECB Forum in Sintra due later on Wednesday.

Data released by Eurostat showed that the preliminary Harmonized Index of Consumer Prices (HICP) rose 2.8% YoY in June, slowing from 3.2% in May and coming in below the 3.0% forecast. On a monthly basis, HICP fell 0.1%, compared with a 0.1% increase in the previous month.

Core HICP, which excludes volatile items such as food and energy, eased to 2.4% YoY in June from 2.6% in May. On a monthly basis, core inflation rose 0.2%, following a 0.3% increase in the previous month.

With inflation showing signs of cooling and Oil prices back near pre-US-Iran war levels, traders are increasingly questioning whether the ECB needs to raise interest rates again this year.

However, ECB policymakers continue to express concern about inflation. ECB Governing Council member Joachim Nagel said he would "keep options open for July, September decisions," while warning that inflation "will stay on a high level this year" and "will stay above target in 2027."

Meanwhile, ECB Governing Council member Martin Kocher said the "inflation threat is lower, not completely contained," adding that the next policy decision would be "either hike or hold."

On the UK side, traders are closely watching political developments following Prime Minister Keir Starmer's resignation last month, as they assess whether frontrunner Andy Burnham would maintain fiscal discipline if he becomes the next prime minister.

Meanwhile, traders are also monitoring the Bank of England's (BoE) policy outlook after BoE Governor Andrew Bailey said on Tuesday that UK inflation could still rise to 3.2% later this year. Bailey added that "financial conditions have tightened, giving the BoE time to evaluate whether it needs to raise the Bank Rate."

Chris Turner at ING argues the ECB is unlikely to drop its tightening rhetoric yet, even if a second September hike might be a mistake. He notes the ECB wants to talk tough to manage inflation dynamics, keeping one hike priced by early next year, and warns EUR/USD could revisit the 1.1325 lows on Kevin Warsh’s comments.

ECB stance keeps Euro under pressure

"As our team have been discussing this week, we think it is too early for the ECB to abandon its tightening rhetoric – even though a second hike in September could be a policy mistake."

"The ECB script remains that last month's rate hike was not an insurance move, and it sounds like the ECB wants to talk tough to ride out this inflation hump and ensure that second-round effects do not emerge."

"That suggests market pricing of one ECB rate hike by early next year can stay in money market curves."

"EUR/USD could make a break back to the 1.1325 lows on Warsh today."

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

Private sector employment in the United States grew by 98K in June, the Automatic Data Processing (ADP) reported on Wednesday. This print followed the 122K increase recorded in May and came in below the market expectation of 113K.

Assessing the report's findings, "the pace of hiring is telling a story of both supply and demand. We know it's taking people longer to find work, but there also are signs of labor supply constraints in certain industries. For now, the overall effect is a slowdown in job creation," said  Nela Richardson, Chief Economist, ADP.

Market reaction

The US Dollar (USD) preserves its strength following this report. At the time of press, the USD Index was up 0.25% on the day at 101.41.

Rabobank’s Jane Foley Senior FX Strategist discusses speculation that Japan’s Ministry of Finance could intervene in favour of the Japanese Yen as USD/JPY trades near levels last seen in 1986. Foley argues that FX intervention alone may not shift negative sentiment and that stronger Bank of Japan rate hike signals are likely needed. Rabobank now forecasts USD/JPY at 159 over three months, assuming a more hawkish BoJ stance and recent adjustments in favour of the Dollar.

Yen intervention risks and BoJ path

"There is so much speculation that the MoF may take advantage of thinned holiday conditions on Friday to intervene in favour of the JPY, that the bigger surprise may be if no action is taken."

"Looking ahead, while further MoF FX intervention in favour of the JPY may seem inevitable, this is likely to be insufficient on its own to change the market’s negative psychology towards the currency."

"In our view, the BoJ may have to signal it is prepared to accelerate the pace of rate hikes before the JPY finds decent support in order to break the market’s attachment to the JPY as a funding currency for carry trades."

"Steady rates are widely expected at the BoJ’s July 31 policy meeting."

"Our forecast of a move back to USD/JPY159 on a 3-month view (up from a previous forecast of 158) assumes a hawkish BoJ."

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

• USD/JPY remains steady near 40-year highs, at 162.84, with intervention risks looming.
• The wide US-Japan Treasury yield differential is weighing heavily on the JPY.
• Japanese authorities might wait for Friday's US bank holiday to step in.
  

The Japanese Yen (JPY) continues heading south against the US Dollar (USD) on Wednesday. The USD/JPY pair has eased to the 162.70 area after hitting a fresh 40-year high at 162.84, but remains above Tuesday’s high of 162.67, nearly 0.6% higher on the week so far.

The Yen is suffering as markets price in near-term Federal Reserve (Fed) monetary policy tightening amid strong US macroeconomic indicators, while in Japan the government is putting pressure on the Bank of Japan (BoJ) to maintain a very gradual pace of monetary tightening.

Pressures on the BoJ to keep rates at low levels

The BoJ hiked interest rates to 1% in June, its highest level in the past 31 years, and markets are pricing in another rate hike before the end of the month. Japan’s Economic Minister Minoru Kiuchi, however, has urged the BoJ to align with the government’s initiatives to boost growth, a veiled call to temper their monetary normalisation plans.

The Fed, on the other hand, is showing an increasingly hawkish rhetoric, as concerns about the labour market dissipate, while inflation remains out of control. This is keeping a wide differential between US and Japanese Treasury yields, keeping the Yen under pressure.

Against this background, the risk that Tokyo steps in to support the Yen increases by the minute. Japanese officials have repeatedly emphasised that they are ready to act at any moment. This, however, is failing to deter speculative traders, as USD/JPY long positions remain near record highs, according to the US regulator. Markets are speculating about the timing of the next round of intervention that might take place on Friday to take advantage of the thinned trading volumes amid the US bank holiday.