USD/JPY hits 40-year highs as dollar stays firm
The Japanese yen tumbled overnight as USD/JPY moved to the highest level since Europe’s The Final Countdown topped the charts in December 1986.
The Japanese yen has weakened as speculation grows that Japanese Prime Minister Sanae Takaichi will push back on further Bank of Japan rate hikes.
USD/JPY has put markets on alert for potential intervention from the Japanese Ministry of Finance.
The US dollar was less impressive in other markets. The US dollar index has recently reversed from 14-month highs after a monster two-week rally that saw the USD index gain 2.5% since the incoming Federal Reserve chair Kevin Warsh’s first Fed decision on 17 June.
However, while the USD has gained on the back of some tougher talk from the Federal Reserve, the potential for a cooldown in inflation as oil prices drop means markets are not convinced the Fed will necessarily follow through on rate hikes. Year-end pricing for rate hikes from the Fed has dropped from 31bps last week to 26bps.
China PMI rebound fails to ease demand concerns
China’s official manufacturing PMI climbed to 50.3 in June from 50.0, beating expectations and returning to expansion territory. The non-manufacturing PMI also inched higher to 50.2, while the composite PMI rose to 50.6. New orders improved to 51.2, export orders returned to expansion at 50.1, and production strengthened to 51.4, supported by demand for high-tech exports.
Despite the stronger headline figures, underlying demand remains fragile. Recent retail sales and property market data continue to point to subdued domestic activity, while factory-gate prices fell further into contraction at 48.2. The latest PMI readings help ease immediate growth concerns but are unlikely to remove expectations for further policy support.
Elsewhere, GBP/USD is near 1-week high.
Next key resistance for GBP/USD is at the 21-day EMA at 1.3299 and the 50-day EMA at 1.3369. Conversely, 1.3200 will be the next key psychological support.
Meanwhile, GBP relative strength is evident in other pairs, with GBP/AUD at 3-month highs, and GBP/CAD at 9-month highs.
ECB hawkish bias is becoming harder to defend
ECB President Lagarde opened the ECB’s annual conference in Sintra with a moderately hawkish tone. She indicated that the June decision to hike rates was “justified under every scenario considered”, pushing back against what many had labelled an “insurance hike” aimed at pre-emptively guarding against rising inflation risks. That said, there was little forward-looking guidance for investors to cling to, as she emphasised a meeting-by-meeting approach amid still-elevated uncertainty.
Yesterday also brought a modest improvement in the June’s European Commission’s economic sentiment indicators, which rose to 95 from 93.7, marking a second consecutive increase. The inflation expectations component stood out, with selling prices declining sharply across both industry and services. This aligns with last week’s PMI data, which pointed to a slower pace of input cost increases.
The ECB’s hawkish stance has become increasingly fragile as oil prices have retreated to near pre-war levels, particularly against the backdrop of a more assertive Federal Reserve. Tomorrow’s eurozone CPI figure could reinforce that fragility and push the timing of any rate hike further out, weighing on the euro. Markets are currently pricing roughly a 65% probability of a move by September.
EUR/USD is hovering below the 1.14 mark as investors await incoming data to provide clearer directional momentum. Key resistance levels to watch are 1.1450, followed by 1.15. Until then, any move higher still feels like profit-taking after several days of intense selling pressure.
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
