Market overview

The dollar lost ground on Thursday as a sharp rally in the Japanese yen triggered a broad shake-out across G10 FX. USD/JPY fell by around 3%, marking the yen’s biggest daily move in almost two years, with price action strongly suggesting official intervention.

The trigger was clear. Yen weakness had stretched to uncomfortable levels, with USD/JPY trading beyond 160 and close to multi-decade highs. At those levels, Japanese authorities had a stronger incentive to act, particularly as a weaker yen was adding to imported inflation at a time of elevated energy prices.

The broader question is whether this was a one-off warning or the start of a more sustained intervention effort. History suggests isolated yen-buying rarely shifts the trend for long. The greater market impact would come from any sign of US backing, which would make speculative positioning far more vulnerable.

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USD: Strong data limits the downside

The dollar was pulled lower by yen-led flows, but the fundamental US story remains resilient. First-quarter growth stayed close to a 2% annualised pace, supported by firm consumer demand and strong business investment, particularly in AI-linked equipment and infrastructure.

Inflation remains sticky, with core PCE running at its fastest pace since 2022, while jobless claims remain near multi-decade lows. That combination makes it difficult for markets to price a meaningful Fed easing cycle, particularly while energy prices remain elevated and inflation expectations are drifting higher.

The next focus is the April manufacturing ISM and a TV appearance from the Fed’s Stephen Miran, the first Fed speaker since this week’s split FOMC decision. He is expected to strike a dovish tone after voting again for a rate cut, but the bar for renewed easing expectations remains high.

DXY should continue to attract buyers around 98.00, with scope to move back towards 98.50 if US data remain firm.

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GBP: Sterling lifted by dollar weakness, not domestic conviction

Sterling’s move was driven more by global FX flows than by the Bank of England. GBP/USD climbed back towards 1.36 as the dollar came under pressure, while GBP/JPY fell sharply as the yen surged.

The BoE left Bank Rate unchanged at 3.75% in an 8-1 vote, signalling patience in the face of external uncertainty. Policymakers acknowledged that energy disruption linked to the Iran conflict could keep inflation above target for longer, but showed little desire to tighten policy in response to a supply-driven shock.

Governor Bailey sounded measured, noting that higher energy costs are hitting an economy already facing a cooler labour market, weak money growth and tight financial conditions. The message was not complacent, but it was cautious. The Bank appears more concerned about deepening the slowdown than reacting aggressively to oil-led price pressures.

Markets read the decision as slightly dovish, with gilt yields falling, especially at the front end. However, sterling’s subsequent recovery was largely a function of broad dollar weakness rather than fresh confidence in the UK outlook.

EUR/GBP remains difficult to read. Lower short-dated GBP swap rates would normally support the cross, yet EUR/GBP fell on the day, possibly reflecting month-end rebalancing into UK assets after April’s underperformance. Support at 0.8600 to 0.8610 now looks exposed in holiday-thinned conditions, even though the broader sterling outlook still looks vulnerable.

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EUR: ECB hawkishness keeps the euro supported

EUR/USD pushed back above 1.17 as yen strength sparked wider dollar selling, while the ECB’s latest policy meeting added a firmer domestic tailwind.

The Governing Council left rates unchanged at 2%, as expected, but President Lagarde delivered a more hawkish message than markets had anticipated. She confirmed that a rate hike was actively discussed, even though the decision to hold was unanimous. Markets now see a June hike as increasingly likely, with pricing close to 90%.

The ECB also noted that the eurozone outlook has shifted away from its March baseline, with greater risks to both growth and inflation. Higher headline inflation pressures linked to the Middle East conflict, plus possible supply-chain disruption, have left policymakers less comfortable with a purely wait-and-see stance.

The challenge is that the economic case for tightening remains fragile. Growth is softening, credit conditions are tightening, loan demand is weaker and core inflation is easing in parts of the bloc. That raises the risk of a policy mistake, with uncomfortable echoes of 2011, when the ECB tightened into an external shock before reversing course.

For now, the euro is supported by a more hawkish ECB, a fading dollar war premium and firmer risk sentiment. However, a decisive EUR/USD breakout likely requires either clearer geopolitical relief, such as a reopening of the Strait of Hormuz, or stronger confirmation that the ECB will follow through.

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Looking ahead

• April US manufacturing ISM will help test the resilience of the US growth story.
• Stephen Miran’s comments will be watched closely after the split FOMC decision.
• DXY support remains important near 98.00, with 98.50 the near-term recovery target.
• Markets will look for signs of further Japanese intervention or possible US coordination.
• EUR/USD should stay supported on dips, but a sustained breakout needs stronger conviction.
• EUR/GBP support at 0.8600 to 0.8610 looks vulnerable in thin trading conditions.