JPY
The Japanese yen is the big story overnight, unsurprisingly given the BoJ policy decision released early this morning. As we noted in our preview of this latest decision, Japanese policymakers have a habit of underwhelming market expectations, producing a pattern of yen weakness post-meeting on dashed hopes of sustained policy normalisation. Not so on this occasion, however. The BoJ hiked the target rate to 0.25% and unveiled plans to halve their bond purchases, matching headlines published yesterday afternoon suggesting a hike in rates to 0.25% was being considered. All told then, this has seen the yen hold onto yesterday’s gains of close to 1% against the dollar, leaving USDJPY to trade in the low 150s this morning. This leaves two big questions moving forward. First, when does the next rate hike come – we expect one more this year, a point seemingly confirmed by Governor Ueda, though caveated with data dependence. Second, what impact does this have on the yen, and how does the BoJ respond? We have long called for yen appreciation once the BoJ kicks off policy easing in earnest, in line with broad sell-side consensus. That said, a sharp yen appreciation from current levels would be a test to see if recent commentary warning against speculative currency moves is two-sided.
USD
While a BoJ rate hike was the major event overnight, geopolitical developments remained the other notable story in focus for the dollar. Specifically, two Israeli airstrikes are reported to have killed senior figures from both Hezbollah and Hamas, with the latter of these targeting a building in Tehran, risking further escalation in regional tensions that are already at boiling point. This should keep geopolitical tensions on the radar today as traders gear up for a Fed decision that should hold few surprises. A hold in rates is widely expected, while Powell is unlikely to offer any concrete guarantees around a September rate cut, though we are aligned with market consensus in thinking that this is still close to certain. Even so, given current market pricing this would still imply a marginal paring in Fed easing expectations, which combined with a potential dollar haven bid on Middle East tensions, should see the broad dollar outperforming today.
EUR
Eurozone inflation data is the key print of note for the single currency today. Not that we think it is likely to be market-moving – country-level data for Germany and Spain yesterday, combined with an early morning release from France all but confirms that the aggregate print is set to land broadly in line with expectations. This should leave the euro trading at the mercy of geopolitics and the Fed today, a scenario that is likely to translate into marginal EURUSD downside, provided our expectations for the latter are met.
GBP
A busy few days for GBPUSD traders kicks off with this evening’s FOMC meeting before attention crosses the Atlantic to settle on the BoE. That said, in contrast to the Fed’s announcement, Thursday’s MPC meeting looks close to a coin toss to us. Even so, we are sticking our neck out and calling for a hold in Bank Rate tomorrow in a break with consensus. What limited recent commentary there has been in recent months has tilted in the direction of a hold – we think Pill, Greene, Haskel, and Mann all favour maintaining Bank Rate at current levels, while Breeden, Lombardelli and to some extent, even Governor Bailey are largely unknowns at this point. Combined with the optics of selling a rate cut with services inflation tracking way above Bank staff forecasts, we think this tilts the balance of risks towards a hold, but only just. That said, if we are right then the surprise to consensus would imply a decent upside move for sterling, with 1.30 potentially in range for GBPUSD, with 1.20 similarly on the table for GBPEUR.
CAD
After a quiet start to the week, today’s GDP reading combined with this evening’s Fed decision should give loonie traders something to finally chew on. We think both events should prove net positive for USDCAD, marrying yet another disappointing domestic growth reading with a modest paring of Fed easing expectations. If realised this should see USDCAD extend its recent run higher after treading water through yesterday’s session. To us, 1.39 still looks like a reasonable target for the pair in the coming weeks.