Forex News

ING’s Chris Turner reports that the Bank of Japan (BoJ) left rates at 1.25% while acknowledging its 2% inflation target has been met and highlighting upside price risks from energy, AI demand and a weak Japanese Yen (JPY). Markets expect the policy rate to reach around 2.00% next summer, and ING now looks for BoJ hikes in December and March/April, with USD/JPY staying near 155–160 before turning lower in 2Q.

BoJ seen hiking into next summer

"The Bank of Japan left the policy interest rate at 1.25% today and, for the first time, signalled that its 2% inflation target had been hit. Running through both the statement and the new Outlook report were three themes that the BoJ felt could all contribute to upside price risks: energy prices, AI demand and the weak yen. In that report, growth forecasts were left around 0.7-0.8% (near or above potential), while CPI forecasts were revised slightly higher."

"Markets are still debating whether the BoJ will hike next at the December or January meeting, but remain confident that the policy rate will be heading up to the 2.00% area next summer."

"The BoJ also gave a nod to rate hikes overseas and presumably will be aware of the risks of a weaker yen should it not track the Fed and ECB with a rate hike in December. We now think the BoJ will hike in December, with a likely follow-up in March/April."

"USD/JPY is a little lower today on this hawkish hold – although the dollar is a little lower across the board. We see it staying bid towards the top of a broad 155-160 range and then turning lower in 2Q next year."

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

• The US Dollar weakens as a technology stock sell-off pushes Treasury yields lower.
• Disappointing technology earnings raise doubts about returns on heavy AI spending.
• Persistent inflation keeps the Fed on a hawkish path, offering underlying support to the US Dollar.

The US Dollar Index (DXY) loses ground for a third straight day on Friday as a sell-off in technology stocks drives investors toward government bonds, pushing Treasury yields lower and weighing on the Greenback. Next week’s US midterm elections add to the cautious mood.

At the time of writing, the index, which measures the Dollar against six major currencies, trades around 101.65. Meanwhile, the benchmark 10-year US Treasury yield stands near 4.91%, down from 5.36% earlier this month, its highest level since 2002.

Results from major technology companies renew concerns about the cost of the AI spending boom. Alphabet shares fell 12.6% on Thursday, while Amazon plunged nearly 7% in premarket trading after their results disappointed investors. Intel sank more than 25% after issuing weaker-than-expected guidance.

The US Dollar is feeling the strain because the country is at the centre of the AI spending boom, which has helped support economic growth. Thursday’s Gross Domestic Product (GDP) report showed that the economy grew at an annualised rate of 3.4% in the third quarter, up from 2.2% in the previous quarter. Traders fear that weaker returns on AI investments could lead companies to cut spending, slowing economic growth.

Strategists at Brown Brothers Harriman argue that the ongoing tech sell-off is likely to keep the Dollar under pressure in the near term, with “the USD index (DXY) likely to test support at 101.00.” However, they stress that “strong US economic activity and rising price pressures reinforce the Fed’s hawkish bias, keeping rate differentials supportive of USD.”

The Federal Open Market Committee (FOMC) voted 10-2 on Wednesday to keep interest rates at 3.75%-4.00%, with Governor Lisa Cook and Cleveland Fed President Beth Hammack favouring a 25-basis-point (bps) rate increase. Fed Chair Kevin Warsh reiterated his commitment to delivering price stability. He noted that “while overall financial conditions are tighter, I’m unwilling and unable to call them tight.”

Inflation remains above the Fed’s 2% target. Data released on Thursday showed that September headline Personal Consumption Expenditures (PCE) inflation rose 0.5% MoM and 3.6% YoY, while the core measure increased 0.3% MoM and 3.1% YoY.

Higher energy costs linked to Middle East tensions risk prolonging elevated inflation. Together with Warsh’s remarks, this keeps expectations of a December rate hike firmly in play, with the CME FedWatch Tool showing the probability at around 75%.

Brown Brothers Harriman’s Elias Haddad reports EUR/USD has rebounded above 1.1200 after the ECB paused while pushing back against aggressive market tightening expectations. Strong Eurozone GDP and inflation projected above target keep a December rate hike in play, though French fiscal concerns could cap Euro gains and potentially drag EUR/USD back toward lower levels.

ECB pause but December hike still live

"EUR/USD recovered above 1.1200 after hitting a 17-month low at 1.1105 following yesterday’s ECB policy decision. The ECB paused and tempered tightening expectations. The ECB kept rates on hold at 2.50% as was widely expected but pushed back against the nearly 75bps of tightening implied by markets over the next twelve months."

"Nevertheless, resilient Eurozone economic activity and inflation projected to remain above target for an extended period keep a December rate hike to 2.75% firmly in play (86% priced in). Indeed, real GDP rose 0.4% q/q in Q3 vs. 0.6% in Q2, double the consensus forecast, as growth in Spain and Germany offset France’s contraction."

"The ECB leadership change is unlikely to alter the near-term policy outlook and has no material implication on EUR. The ECB Governing Council is not a one-person show; 21 members have voting rights, including six Executive Board members and 15 governors of the national central banks."

"Bottom line, limited policy divergence between the ECB and Fed offers EUR/USD support. However, France’s ongoing fiscal troubles can drive EUR/USD down to 1.1000."

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

• WTI Oil remains above $103.00 after hitting fresh five-month highs at $104.00.
• Ongoing attacks in the Strait of Hormuz have increased concerns about supply disruptions.
• Regional powers keep pushing for a peace deal, but the US keeps the military option on the table.

Oil appreciates for the third consecutive day on Friday as reports of new attacks on vessels attempting to cross the Strait of Hormuz boost concerns about supply disruptions. The price of the US benchmark West Texas Intermediate (WTI) barrel remains above $103.00 after having reached five-month highs just above 104.00 earlier in the day, and is on track to close the month with a 15% appreciation.

Attacks on vessels in the Strait of Hormuz keep pushing Crude prices higher. On Friday, the UK Maritime Trade Organisation (UKMTO) said that an Oil tanker was disabled after the explosion of two limpet mines in the first successful attack with this kind of explosive since the conflict started in February.

Beyond that, the Iranian Islamic Revolutionary Guard Corps (IRGC) authorities affirmed that four vessels struck tankers in the Hormuz waterway, while the Tehran-backed Houthi militias claimed attacks on Saudi Arabia airports and Oil infrastructure, increasing concerns about global supply.

Qatari mediators return to Tehran to broker a peace deal

Meanwhile, regional mediators maintain their efforts to push towards an elusive peace deal. Reuters reported earlier on Friday that a Qatari delegation returned to Tehran in another attempt to bring the US and Iran back to the negotiating table after US Vice President JD Vance allegedly contacted Iranian officials proposing a new diplomatic process.

Markets, however, remain sceptical about any immediate progress towards a negotiated end of the conflict as the parties' positions remain far apart on key issues like uranium enrichment. Against this backdrop, a report by the Wall Street Journal affirmed on Thursday that a top US commander has briefed US President Donald Trump on the military options in Iran, which suggests that hostilities might resume after next week’s mid-term elections.

Rabobank's Senior Macro Strategist Bas van Geffen reports that President Lagarde acknowledged inflation will remain well above target and that the European Central Bank (ECB) discussed a rate hike but left policy unchanged. She hinted at a possible December rate increase, while mixed messaging and internal estimates of higher bond yields’ drag on growth and inflation suggest policymakers hope to pause afterwards amid leadership changes at the ECB.

Lagarde hints at December rate move

"She said that the ECB debated whether a rate hike was appropriate already, but policymakers decided to leave policy unchanged yesterday. Lagarde hinted that the ECB is preparing a rate hike in December, but the ECB’s messaging wasn’t strictly hawkish."

"Even though energy prices now exceed the ECB’s baseline forecasts, President Lagarde noted that the Governing Council does not see greater risk of second-round effects than in September. This suggests that policymakers expect that the latest increase in energy prices will have a stronger negative impact on growth than the earlier energy, limiting passthrough to wages and prices."

"Indeed, Lagarde referred to the deteriorating sentiment amongst consumers. The ECB also expects that tighter financial conditions will weigh on the growth outlook. Shortly after the meeting, anonymous sources tactically leaked internal estimates that the recent rise in bond yields subtract around 1 percentage point from 2027-2028 growth and 90 basis points from inflation, compared to the September baseline."

"This mixed messaging from the ECB suggests that policymakers hope that they can take a pause after a December hike. That’s all, of course, subject to a highly uncertain outlook. But that’s not really Lagarde’s concern anymore: she will be leaving the ECB after the February policy meeting."

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