Yen breaks through key support
Market overview
The yen remains the dominant story across FX, with USD/JPY extending its decline through 155 and breaking below the lows seen around this summer’s joint US-Japan intervention. The move reflects a broader repricing of Japanese policy rather than one single catalyst, with expectations for faster BoJ tightening, potential repatriation flows and the unwinding of sizeable short-yen positions all adding momentum. Elsewhere, the dollar remains sensitive to next week’s Fed decision, sterling is trading against a more uncertain UK fiscal backdrop, while the euro is holding firm ahead of an ECB meeting where expectations are already heavily tilted towards further tightening. With several major central bank decisions approaching, relative policy expectations are once again driving the direction of the major crosses.
USD: Fed decision becomes the next test
The dollar has softened as USD/JPY extends its decline, although yesterday’s US Labour Day closure likely exaggerated some of the move in DXY. We continue to see potential support around the 98.50 to 98.70 area, but that view could be tested if further yen-positive headlines emerge.
Attention now turns firmly to the Federal Reserve. Markets are pricing roughly a 60% probability of a rate hike next week, leaving Friday’s August CPI release as a potentially decisive input.
A Fed hike would likely provide some support to the dollar and could keep USD/JPY within a broad 155 to 160 range. A hold, by contrast, would risk reinforcing the current downside momentum in the pair.
JPY: Yen momentum builds below 155
The yen remains one of the strongest performers across G10 FX, with USD/JPY breaking below 155 and moving through the lows reached around this summer’s joint US-Japan intervention. The move has been driven by a combination of stronger expectations for BoJ tightening, speculation over domestic repatriation flows and the unwinding of sizeable short-yen positions.
Markets now price a BoJ hike to 1.25% on 18 September, with another move expected before year-end. Expectations that Japan’s $2 trillion GPIF could increase its allocation to domestic assets have added further support.
However, a significant amount of yen-positive news is now reflected in pricing. Extending the rally may require evidence that the BoJ is prepared to tighten more quickly than markets currently expect. Next week’s Fed decision is also important, with a US rate hike potentially slowing the decline in USD/JPY, while a hold could open the door to further yen strength.
GBP: Fiscal credibility back in focus
Sterling is facing a more complicated domestic backdrop following Chancellor John Hailey’s first major speech since taking charge of the UK’s finances. Hailey and Prime Minister Burnham have both stressed the importance of restoring credibility in international bond markets while maintaining growth as a central policy objective.
The challenge is that borrowing costs have risen to multi-decade highs, reducing fiscal headroom and increasing speculation that further tax rises may be required at the Autumn Budget.
For now, markets appear willing to give the new administration time to establish its fiscal credentials. That patience may become more limited as the Budget approaches, particularly if investors see growing tension between spending ambitions, growth objectives and fiscal restraint. This leaves both gilts and sterling exposed to renewed pressure.
EUR: ECB expectations leave limited room for surprise
German industrial production disappointed in July, falling 1.1% month-on-month against expectations for a 0.2% rise, while annual output declined 1.6%. The data underline the uneven nature of Germany’s recovery, although temporary factors including summer heat and disruption along the Rhine may have contributed to the weakness.
The euro showed little reaction, with markets instead focused on Thursday’s ECB decision. A rate hike is almost fully priced, meaning the greater market risk sits with President Lagarde’s guidance rather than the decision itself.
Pricing still points to close to two further hikes by the end of 2026, which leaves the euro vulnerable if the ECB adopts a more cautious tone. Any suggestion that energy pressures are not feeding materially into broader inflation, or that policymakers want more time to assess the impact of previous tightening, could encourage markets to scale back the expected rate path and weigh on the single currency.
Looking ahead
USD: Friday’s US CPI will be central to expectations for next week’s Fed decision.
JPY: Further gains may require evidence that the BoJ is prepared to tighten faster than currently expected.
EUR: Thursday’s ECB meeting will be driven more by Lagarde’s guidance than the widely expected rate move.
GBP: UK fiscal credibility and rising gilt yields remain important risks for sterling as the Autumn Budget approaches.
USD/JPY: A break below 155 keeps the downside bias intact, although a Fed hike could slow the move.