Today’s Market Outlook
Yen Strength and Dollar Weakness Intersect as USD/JPY Searches for Support Amid Official Warnings and Pre-Weekend Positioning
Market Overview
FX markets are seeing a correction in the dollar strength and yen weakness that has persisted throughout the week.
USD/JPY rose from 156.58 on Monday the 21st to 159.04 yesterday, but today it has pulled back from a high of 158.95 to 157.67. It is currently trading around 157.86.
The move reflects yen-strengthening comments from Finance Minister Katayama and Prime Minister Takaichi, lower oil prices, declining US Treasury yields and profit-taking ahead of the weekend.
During the London morning, yen buying has been accompanied by dollar selling against both the pound and euro. GBP/USD has risen to 1.3250, while EUR/USD has climbed to 1.1401.
The focus for the remainder of the session will be whether USD/JPY can hold 157.50, whether dollar selling broadens across the major currencies and whether US yields rebound in response to US economic data and comments from monetary policymakers.
Yen Strength and Dollar Weakness Intersect
In the London market, yen-specific buying and broad-based dollar selling are occurring at the same time.
Yen buying has been supported by verbal warnings against yen weakness from the Japanese government.
Finance Minister Katayama stated that decisive action would be taken against excessively speculative moves in the foreign-exchange market.
Prime Minister Takaichi also explained that, during the Japan-US summit, the US side raised concerns that yen weakness was making US trade more difficult. She reiterated the view that, in general terms, an undervalued yen is problematic.
Meanwhile, dollar selling has been influenced by lower oil prices, a pause in the rise of US yields and position adjustments ahead of the weekend.
As a result, today’s move is not merely a correction in USD/JPY. Dollar selling is also spreading to EUR/USD and GBP/USD.
USD/JPY
USD/JPY has fallen from 159.04 to 157.67, marking a clear correction to this week’s rally.
The daily chart is increasingly likely to form its first bearish candle since 17 September.
The following upside levels are in focus.
• 158.00
• 158.50
• 159.04
• 159.50
• 160.00
The first question is whether USD/JPY can recover 158.00. Even if it returns to the 158 range, selling on rallies is likely to emerge if the pair cannot move above 158.50.
On the downside, the following levels should be monitored.
• 157.67
• 157.50
• 157.00
• 156.58
A clear break below 157.50 could lead to a decline towards 157.00. If 157.00 also fails to hold, Monday’s low near 156.58 becomes the next reference point.
Conversely, if USD/JPY stabilises around 157.50 and US economic data is strong, a recovery towards 158.00 is possible.
Warnings Against Yen Weakness From Both Japan and the United States
An important aspect of the current warnings against yen weakness is that concerns have reportedly been expressed not only by Japan but also by the United States.
This is likely to reinforce the market view that both governments see excessive dollar strength and yen weakness as problematic.
Rate-check reports emerged near 158 last week. USD/JPY subsequently rose into the 159 range, bringing market concern closer to actual intervention rather than verbal intervention alone.
If USD/JPY rises back into the 159 range, traders should watch not only for comments from Japanese officials but also for criticism of dollar strength and yen weakness from the Trump administration.
GBP/USD
GBP/USD has extended its intraday high to 1.3250 and is currently trading near 1.3245.
Bank of England Governor Bailey stated that if high energy prices persist, policy responses will become more difficult, adding that maintaining the current monetary-policy stance will become increasingly challenging.
Markets interpreted the remarks as signalling that the BOE may consider additional rate hikes, supporting sterling.
A clear break above 1.3250 could open room towards 1.3300.
Conversely, if energy prices decline again and expectations for further BOE tightening fade, GBP/USD could be pushed back towards 1.3200.
EUR/USD
EUR/USD has also extended its intraday high to 1.1401 and is currently trading near 1.1398.
The pair is rebounding alongside sterling strength and broader dollar selling, but strong euro-specific buying factors remain limited.
A clear move above 1.1400 could bring a recovery towards 1.1450 into focus.
Conversely, if US yields rebound, the pair may be capped near 1.1400 and fall back towards 1.1350.
Yen Crosses
With yen strength and European currency buying occurring at the same time, the yen crosses lack clear direction.
EUR/JPY is fluctuating nervously around 180, while GBP/JPY is moving around 209.
Current levels are as follows.
• USD/JPY: 157.86
• EUR/JPY: 179.93
• GBP/JPY: 209.09
• EUR/USD: 1.1398
• GBP/USD: 1.3245
If yen-strengthening pressure in USD/JPY intensifies, the upside in the yen crosses may remain limited even if EUR/USD and GBP/USD rise.
Whether EUR/JPY can reclaim 180 on a sustained basis and GBP/JPY can recover 209 steadily will be useful gauges of the strength of yen buying.
Oil and US Yields
NY crude futures are trading around US$93, having pulled back from this week’s high.
Higher oil prices had supported both dollar buying and yen selling through US inflation concerns and a deterioration in Japan’s terms of trade.
The pullback in oil prices is reducing both of these USD/JPY-supportive factors.
The US 10-year Treasury yield is trading around 5.17%. While the level itself remains high, upward momentum has paused.
If US yields fall below 5.15% and continue to decline, USD/JPY is likely to face greater pressure towards 157.00.
Conversely, strong US economic data and renewed gains in US yields could trigger an unwinding of dollar selling.
US Durable Goods Orders
The US advance reading for August durable goods orders is today’s key economic release.
A stronger-than-expected result would highlight the resilience of US capital investment and economic activity, likely supporting higher US yields and dollar buying.
In this scenario, USD/JPY could recover the 158 range, while EUR/USD and GBP/USD may pull back from their highs.
Conversely, a significant downside surprise could increase concerns over a US economic slowdown, strengthening dollar selling alongside lower US yields. USD/JPY may test below 157.00.
University of Michigan Consumer Sentiment
The final September reading of the University of Michigan consumer sentiment index will also be released.
Alongside the headline index, consumer inflation expectations will be particularly important.
An upward revision to inflation expectations could lead to renewed dollar buying through expectations for further Fed rate hikes.
If inflation expectations decline, the effect could combine with lower oil prices to reinforce the correction in dollar strength.
Central Bank Speakers
Officials from the Fed, ECB and BOE are scheduled to speak at a financial economics conference jointly hosted by the New York Fed, ECB and Bank of England.
• BOE Governor Bailey
• New York Fed President Williams
• Kansas City Fed President Schmid
• Cleveland Fed President Hammack
If Fed officials reaffirm the hawkish stance of the latest FOMC meeting, US yields and the dollar may rebound.
Conversely, if they focus on lower oil prices, downside economic risks or a cautious approach to further rate hikes, dollar selling could continue.
For sterling, the key point will be whether BOE officials, following Governor Bailey, continue to express concern about elevated energy prices.
Today’s Economic Data and Events
• Eurozone August M3 money supply
• Brazil September IPCA inflation
• Mexico August employment data
• US August advance durable goods orders
• Final September University of Michigan consumer sentiment index
• Comments from European and US monetary policymakers
• UN General Assembly general debate
• Rating reviews for the euro area, Italy and Oman
Key Points for Overseas Markets
① Will USD/JPY fall below 157.67?
② Can 157.50 and 157.00 hold?
③ Will further verbal warnings against yen weakness follow comments by Finance Minister Katayama and Prime Minister Takaichi?
④ Will oil prices decline further from around US$93?
⑤ Will the US 10-year Treasury yield fall below 5.15%?
⑥ Will US durable goods orders support the dollar?
⑦ Will University of Michigan inflation expectations be revised?
⑧ Can GBP/USD break above 1.3250?
⑨ Can EUR/USD establish itself above 1.1400?
⑩ Will pre-weekend unwinding of dollar-long and yen-short positions continue?
Expected Scenarios
Continued Yen-Strength and Dollar-Weakness Scenario
If oil prices and US yields decline, while warnings against yen weakness from Japanese and US authorities remain in focus, the correction in USD/JPY is likely to continue. A break below 157.50 would bring 157.00, followed by 156.58, into view. EUR/USD may remain in the 1.1400 range, while GBP/USD could attempt a break above 1.3250.
USD/JPY Stabilisation Scenario
If USD/JPY holds near 157.50 and durable goods orders or inflation expectations are strong, buying could return towards 158.00. However, official warnings against yen weakness are likely to cap the upside in the 158 range.
Sterling Outperformance Scenario
If BOE officials point to the possibility of further rate hikes while Fed officials adopt a more cautious tone, GBP/USD could rise towards 1.3300. However, if yen buying persists, GBP/JPY may remain directionless around 209.
Renewed Dollar-Strength Scenario
If US economic data is strong, Fed officials maintain a hawkish stance and US yields rebound, dollar strength could resume. USD/JPY may recover the 158 range, while EUR/USD and GBP/USD are likely to give back today’s gains.
Summary
During the London session, yen buying driven by verbal warnings against yen weakness from Japanese and US authorities is occurring alongside dollar selling caused by lower oil prices and a pause in the rise of US yields.
USD/JPY has fallen from 159.04 to 157.67, marking a correction to this week’s advance.
Meanwhile, comments from BOE Governor Bailey have highlighted the possibility of further rate hikes, lifting GBP/USD to 1.3250. EUR/USD has also risen to 1.1401.
The key focus for the remainder of the session will be whether USD/JPY can hold 157.50, whether GBP/USD can break above 1.3250 and whether US yields rebound following US economic data.
The dollar-strength trend since the FOMC has not completely broken down. However, with yen strength and dollar weakness occurring simultaneously ahead of the weekend, there is a risk that the correction in USD/JPY could deepen further.
