Today’s Market Outlook
Dollar Buying Supported by Higher Oil Prices and U.S. Yields
Assessing Whether the Move Can Continue Ahead of the FOMC
Market Overview
In overseas markets, the U.S. dollar is broadly supported by higher oil prices and rising U.S. Treasury yields.
Heightened tensions in the Middle East pushed NY crude futures briefly into the low US$104 range. The U.S. 10-year Treasury yield also rose to 5.039%, strengthening dollar demand through both safe-haven flows and expectations that persistent inflation could lead to further Fed rate hikes.
USD/JPY briefly rose to ¥155.24. EUR/USD fell to around 1.1527, while GBP/USD declined to around 1.3464.
However, higher oil prices and yields are weighing on equities, with European stocks and U.S. equity futures trading lower. The focus for the rest of the session will be whether dollar strength can continue, or whether equity weakness triggers renewed safe-haven demand for the yen.
Higher Oil Prices and the Middle East Situation
NY crude futures climbed close to US$105 yesterday before temporarily falling back toward US$100. Today, however, prices have risen again into the US$103–104 range.
As long as Middle East tensions and supply concerns persist, oil prices are likely to remain well supported.
If oil prices continue to rise, markets are likely to focus on the following sequence:
• Renewed concern over accelerating inflation
• Rising expectations of further Fed rate hikes
• Higher long-term U.S. yields
• Dollar buying
However, if higher oil prices increase concerns about economic deterioration and trigger a broader global equity sell-off, risk-averse yen buying could also strengthen in FX markets.
U.S. Yields and the FOMC
The U.S. 10-year Treasury yield has moved above 5%, briefly reaching 5.039%.
The fact that Treasury selling continues despite the yield moving above the psychologically important 5% level suggests there has been no clear change in the upward yield trend so far.
In addition to a September rate hike, markets are beginning to price in the possibility that the Fed could raise rates several more times afterward, driven by Middle East tensions and higher oil prices.
Today marks the first day of the FOMC meeting. Position-taking may become more restrained ahead of the policy decision, but dollar buying is likely to remain supported if oil prices and U.S. yields continue to rise.
At the FOMC, the focus will be not only on the policy rate, but also on the expected number of future hikes, the inflation outlook, and Chair Warsh’s assessment of higher oil prices.
U.S. 20-Year Treasury Auction
A US$13 billion auction of 20-year U.S. Treasuries is scheduled today.
Weak demand could lead to further Treasury selling and higher long-term yields, supporting the dollar.
Conversely, if investor demand strengthens at yields above 5%, Treasuries could be bought back, leading to lower U.S. yields and a correction in dollar strength.
In the New York session, attention should be paid to the reaction in 10-year and 20-year Treasury yields after the auction.
USD/JPY
USD/JPY was bought from around ¥154.21 in early Tokyo trading and rose to ¥155.24 in early London trading. It has since pulled back into the upper ¥154 range.
A September Bank of Japan rate hike is already substantially priced in, while expectations for several additional rate hikes are building in the United States. As a result, a major narrowing of the U.S.-Japan yield gap appears unlikely, making USD/JPY more likely to find buying interest on dips.
However, an option expiry at ¥155.00 is scheduled for today’s New York cut, which may keep price action centred around that level until the expiry.
On the upside, the first focus is whether USD/JPY can break clearly above ¥155.24. A break would open room for a move toward ¥156.
On the downside, the ¥154.20 area is the nearest support level. If equity weakness accelerates and the unwinding of yen carry trades intensifies, a move below ¥154 should also be watched.
EUR/USD
EUR/USD fell from around 1.1553 to a low near 1.1527.
Dollar buying driven by higher U.S. yields is weighing on the pair, while higher oil prices also represent a burden for the energy-importing euro area economy.
Several ECB officials are scheduled to speak today. Strong concern about inflation could prompt a euro rebound, but if the negative effects on growth are emphasised, upside is likely to remain limited.
The 1.1500 level is the key near-term psychological support. A clear break below 1.1500 could make the dollar-strength trend more pronounced.
GBP/USD
GBP/USD fell to around 1.3464 as weak UK employment data coincided with broad dollar strength.
Slowing job vacancies, payroll growth, and wage growth are reducing expectations for further Bank of England rate hikes.
If U.S. rate-hike expectations strengthen while UK tightening expectations fade, the widening policy gap between the United States and the United Kingdom is likely to keep GBP/USD vulnerable to selling on rallies.
A break below the 1.3450 area would bring a move toward 1.3400 into focus.
Cross-Yen Pairs
EUR/JPY rose to around ¥179.08, while GBP/JPY climbed to around ¥209.10.
The rise in USD/JPY is supporting cross-yen pairs, but equity markets remain weak, making it difficult to chase prices aggressively higher.
If equities remain stable despite higher U.S. yields, cross-yen pairs are likely to stay resilient. However, if equity losses accelerate, yen buying could intensify more sharply in cross-yen pairs than in USD/JPY.
Treasury Secretary Bessent’s Congressional Testimony
U.S. Treasury Secretary Bessent is scheduled to appear before the House Financial Services Committee.
Markets will be watching for comments on rising long-term yields, Treasury buybacks, fiscal consolidation measures, and the large U.S. government debt burden.
If he outlines concrete measures to contain rising long-term yields, it could encourage Treasury buying and lead to a correction in dollar strength.
Conversely, if doubts remain over the effectiveness of fiscal improvement measures, Treasury selling could continue. However, it is important to note that rising yields driven by fiscal concerns do not necessarily translate directly into dollar buying.
Today’s Economic Data and Events
• Germany’s September ZEW Economic Sentiment Index
• Eurozone July trade balance
• Brazil July retail sales
• U.S. September New York Fed Manufacturing Index
• Canada July wholesale sales
• Speeches by ECB officials
• Treasury Secretary Bessent’s appearance before a House committee
• U.S. 20-year Treasury auction
• First day of the FOMC meeting
The New York Fed Manufacturing Index is expected at 15.0, down from 20.6 previously.
A stronger-than-expected reading would reinforce the view that the U.S. economy remains resilient, potentially lifting yields and supporting the dollar. A significant downside surprise could raise concerns about slowing growth, push U.S. yields lower, and trigger a correction in dollar strength.
Key Points for Overseas Markets
- Whether NY crude futures move back toward US$105
- Whether the U.S. 10-year Treasury yield holds above 5%
- Whether Treasury selling accelerates after the 20-year auction
- Whether USD/JPY breaks above ¥155.24
- The impact of today’s ¥155.00 New York cut option expiry
- Whether EUR/USD can hold above 1.1500
- Whether equity weakness triggers further unwinding of yen carry trades
- Whether Treasury Secretary Bessent comments on long-term yields or Treasury buybacks
- Whether position adjustments increase ahead of the FOMC
Potential Scenarios
Continued Dollar-Strength Scenario
If crude rises toward US$105 and the U.S. 10-year yield extends its gains above 5%, dollar buying is likely to continue through the combined effects of geopolitical risk, inflation concerns, and higher yields. USD/JPY could break above ¥155.24 and move toward ¥156, while EUR/USD could fall below 1.1500.
Simultaneous Dollar-Strength and Yen-Strength Scenario
If higher oil prices and yields trigger a sharper global equity sell-off, both the dollar and the yen could strengthen at the same time. In this case, EUR/USD and GBP/USD would likely fall, while USD/JPY could struggle to extend gains above the ¥155 area.
Dollar-Correction Scenario
If oil prices retreat and the 20-year Treasury auction attracts strong demand, U.S. yields could fall and prompt a correction in dollar strength, accompanied by profit-taking ahead of the FOMC. In this case, the focus would shift to a move toward ¥154.20 in USD/JPY and toward 1.1550 in EUR/USD.
Summary
Today’s market environment remains favourable for the dollar, supported by higher oil prices due to Middle East tensions, concerns over persistent inflation, and the move in long-term U.S. yields above 5%.
USD/JPY has risen into the ¥155 range, but the ¥155.00 option expiry and yen buying linked to weaker equities are limiting the upside. EUR/USD and GBP/USD are likely to remain under pressure due to yield differentials with the United States and higher energy costs.
The key factors for the rest of the day will be oil prices, the U.S. 20-year Treasury auction, and comments from Treasury Secretary Bessent. If U.S. yields rise further above 5%, dollar strength could continue. If equity weakness becomes more severe, attention should shift to risk-averse moves accompanied by yen strength.
