A yen bounce catches markets off guard
The dollar’s rally stalled as USDJPY fell amid intervention speculation and hawkish BoJ commentary, while softer US data added pressure ahead of Friday’s payrolls report.
USD
The dollar's early-week rally stalled yesterday, leaving the DXY to finish trading in the mid-99s. The primary catalyst appeared to be a dip in USDJPY, prompting intervention speculation amongst traders; however, we would also flag a battery of hawkish commentary from BoJ officials as another possible driver. With confirmation not yet forthcoming, we remain open-minded. Yen spillovers aside, soft data added to the dollar drag: ADP printed just 38k against 47k expected, though factory orders beat at +0.9%. A further USDJPY slide overnight sees the pair at 157 this morning, with this move weighing on the broad dollar in turn. Today brings jobless claims, ISM services, and Fedspeak from Waller and Hammack, but as we flagged in our week ahead, tomorrow's payrolls report remains the week's decisive event for the Fed call.
EUR
The euro has edged higher overnight on broad dollar softness, with domestic catalysts few and far between, and the ECB now in its pre-meeting quiet period. Granted, Tuesday's inflation print continues to frame the ECB debate: headline accelerated to 3.3% in August, a three-year high driven overwhelmingly by the energy shock from the Hormuz closure, while core eased to 2.4%, below consensus and the lowest since June. That mix supports our view, reiterated in yesterday's report, that the ECB will hike 25bps to 2.50% at next Thursday's meeting, but that the path beyond September is far less certain given cooling underlying pressures. With the single currency effectively hostage to oil headlines, overnight signs of improved tanker flows through the Strait offer some marginal relief. Today's calendar is second-tier — final services PMIs and producer prices — leaving the euro to trade off the dollar leg and geopolitics ahead of tomorrow's US jobs data.
GBP
Cable failed to sustain a break above 1.35 yesterday, having begun the week closer to 1.36, with the fiscal risk premium in sterling assets front and centre ahead of the autumn budget. The political backdrop offers little comfort: Keir Starmer confirmed at the start of this week that he is quitting domestic politics altogether, a reminder that the leadership transition triggered by his June resignation is still reverberating through Labour's fiscal credibility. Our bias towards sterling downside on unresolved fiscal challenges, first set out in the summer, continues to play out. Today's domestic calendar is thin, with only the final services PMI due, so cable should continue to trade as a function of gilt yields, the broad dollar, and oil prices, with elevated energy costs a stagflationary headwind the Bank of England can ill afford.
CAD
As expected, the Bank of Canada left rates at 2.25% yesterday, a seventh consecutive hold. Instead, it was guidance that mattered: the Bank flagged upside risks to inflation from US tariffs, Canadian counter-tariffs, and oil prices. That hawkish tilt has helped push USDCAD back toward 1.38 for now, though we are inclined to see risks beyond the end of this week as skewed to the upside for the pair. US-Canada trade tensions favour the greenback on a relative basis, though Friday’s North American jobs data leaves us cautious on the more immediate direction for the pair.