Global Head of Macro Strategy
Summary: Fed Chair Powell surprised the market by suggesting a December rate cut is no foregone conclusion, sending US treasury yields and the US dollar higher. Overnight, a very dovish Bank of Japan press conference sent the yen sharply lower.
USD double-take post FOMC, JPY tanks on very dovish BoJ.
The FOMC statement was as expected as the Fed chopped the policy rate 0.25% and announced that its balance sheet reduction (QT or quantitative tightening) would end on December 1. There was a mild surprise on one voter dissenting in favour of no cut. But the big surprise came in the Fed Chair Powell press conference, as he took trouble to underline that another 25-bp cut in December is no foregone conclusion as the Fed is not comfortable enough with forecasts for inflation or the economy slowing to commit to anything now, with the lack of data an additional frustration making things murky. US treasury yields jolted higher and the US dollar saw a sharp rally that was oddly partially unwound overnight before USD strength came back in today in the European session – and accelerating in hour before publishing this.
The Bank of Japan was an incredibly dovish affair, chiefly during the Governor Ueda press conference as Ueda claimed that the Bank was not risking falling behind the curve and that he would still like to see some more wage data during the new tariff regime to understand the inflation risks. That suggests the willingness to wait for the late winter/spring wage negotiation rounds before making any policy move. The combination of a hawkish Fed boosting US treasury yields and this dovish BoJ outcome was the most negative possible scenario for the JPY, which has tumbled to new lows versus the USD, the EUR and elsewhere.
Regarding that JPY strength idea…clearly too early!
In my previous update, I floated the idea that the JPY could eventually strengthen on investment flows returning to Japan as a major contributing factor in addition to the slow BoJ policy normalization relative to further Fed rate reductions. I also noted that there was little to no support or traction for this idea on the JPY charts just yet. With the very dovish BoJ here and the hawkish Fed surprise driving a surge in US treasury yields, JPY bulls will need to sit on their hands for at least a while longer until something more compelling develops as we have just seen another bullish break higher in USDJPY above 153.25 until proven otherwise (more below), a move that could challenge the 160 level eventually if Japan doesn’t want to put up a fight against JPY weakness and US treasury yields continue to pull higher.
Chart: USDJPY
USDJPY punched through local resistance and is trading at multi-month highs. The move basically opens up the rest of the empty space above if we continue right through the descending trendline near the current price. The next levels higher are the two resistance levels of the prior major tops at 158.87 and then the remarkable 161.95. Only a sudden flipping of the table here and huge sell-off based on some new event emerging out of left field could alter the technical picture.
Looking ahead
ECB meeting today – This is up shortly and is unlikely to generate significant signals, given that the ECB has declared that its policy rate is on hold for now, but would do well to wax a bit concerned on the state of the Eurozone economy, if unlikely to express enough concern to move the needle.
I haven’t even mentioned the event most in focus in recent weeks, the Trump-Xi meeting and whether we move further in the direction of de-escalation in US-China trade relations, which is indeed what we have done, clearing away the uncertainty that had generally already been cleared away ahead before the fact. Now, we watch for the US government shutdown to end as soon as next week or the week on the exponentially increasing dysfunction from here (temporary airport closures due to lack of staff, food stamp payments ceasing on November 1). Finally, there are the Supreme Court hearings on the two cases challenging Trump’s tariffs next Wednesday, though I’ve not seen when a decision might come down (weeks, months?) and the Trump administration could change the legal basis of the tariffs with or without the Supreme Court ruling against.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
The JPY weakness is back in spades and the US dollar is trying to build into something bigger here, with the AUD unlikely to manage to keep pace if the greenback is resurgent. Sterling weakness also a newly entrenched theme.
Table: NEW FX Board Trend Scoreboard for individual pairs. The EURUSD sell-off is aiming for confirmation now with the pair well back below 1.1600, and a break below 1.1542 would help seal the deal, potentially setting up a run much lower, with targets starting at 1.1400 and running a far as 1.1240 for now. GBP: EURGBP, meanwhile, is rather interesting technically on the 0.8760 break, but GBPUSD is the big mover, slicing down and now attacking a huge range support at 1.3141. The next area there would be the psychological 1.3000 level. CHF: Don’t look now, but USDCHF is trying to gain a toehold back above 0.8000 and there could be 0.8200 or 0.8300+ in that one as the big-picture bear trend looks exhausted.
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