Today’s Market Outlook Will Calm Summer-Vacation Trading Continue? Dollar Weakness and Dip-Buying Demand Intersect

Today’s Market Outlook
Will Calm Summer-Vacation Trading Continue? Dollar Weakness and Dip-Buying Demand Intersect

■ Market Summary

As the global summer vacation season reduces market participation, today’s FX market is showing relatively calm trading conditions.

Following the U.S. employment report on the 7th, last week’s U.S. CPI, PPI, and retail sales data were also broadly weak. As a result, expectations for an additional rate hike at the September FOMC meeting have declined substantially.

Before the U.S. employment report, expectations for a rate hike exceeded expectations for no change. Currently, however, the market is pricing in just over a 70% probability of no change and just under a 30% probability of a rate hike, indicating a clear shift in monetary-policy expectations.

This has placed modest selling pressure on the dollar, with USD/JPY briefly falling below 159.00.

However, buying interest remains strong during USD/JPY declines, and dollar weakness has not developed into a one-directional move.

With few major economic indicators scheduled this week, market focus is shifting toward the Jackson Hole symposium in the latter half of next week.

■ USD/JPY

USD/JPY has briefly traded below 159.00.

A series of weak U.S. employment, inflation, and consumer-spending indicators has reduced expectations for a September rate hike, capping the dollar’s upside.

However, the dollar selling seen after last Friday’s U.S. retail sales release did not last long.

USD/JPY continues to attract dip-buying during declines, while yen-selling demand linked to the U.S.-Japan interest-rate gap and yen carry trades remains in place.

As a result, USD/JPY is difficult to chase higher, but it is also likely to be bought back during larger declines.

For the time being, the battle around 159.00 is likely to continue.

■ September FOMC

Market expectations for the September FOMC have shifted significantly in recent weeks.

Before the U.S. employment report, more market participants expected an additional rate hike. However, the subsequent U.S. employment report, CPI, PPI, and retail sales data all pointed to moderating economic activity and inflation.

As a result, expectations for no change have now risen to just over 70%.

Expectations for an additional rate hike have fallen to just under 30%, making a policy hold the emerging base case.

This trend is a factor limiting the dollar’s upside.

However, the possibility of an additional rate hike has not disappeared completely. If upcoming economic data or the Jackson Hole symposium prompt the Federal Reserve to emphasize inflation risks again, rate-hike expectations could rise once more.

■ Dollar Market

The dollar is soft against major currencies.

Fading expectations for an early U.S. rate hike are the main driver of dollar selling.

However, none of the dollar-selling reactions to recent weak U.S. data have lasted long.

Interest-rate differentials between the United States and other countries remain wide, while uncertainty surrounding Middle East developments also persists. As a result, the market has not been willing to build aggressive dollar-short positions.

With few major indicators scheduled this week, the dollar market is likely to focus more on adjusting existing positions than on developing a strong new direction.

■ EUR/USD

EUR/USD remains supported around the upper 1.15 range.

Dollar weakness caused by fading U.S. rate-hike expectations is supporting the euro.

However, buying interest above 1.1600 remains limited. Although U.S. rate-hike expectations have declined, there has not been a major change in the relative monetary-policy outlook between the United States and Europe.

Therefore, new catalysts are likely to be needed for EUR/USD to rise substantially into the 1.16 range based solely on dollar selling.

For now, the focus will be on whether EUR/USD can test a move above 1.1600 while remaining supported in the upper 1.15 range.

■ GBP/USD

In the London session, GBP/USD is rising amid broad dollar weakness.

The pair has broken above last Friday’s high of 1.3562, reaching its strongest sterling and weakest dollar level since 12 May.

The move is driven less by a sterling-specific positive factor than by dollar selling following the decline in U.S. rate-hike expectations.

However, the break above recent highs makes sterling buying more likely from a technical perspective.

If dollar weakness continues, GBP/USD may extend further higher.

On the other hand, with market liquidity declining during the summer holiday season, caution is needed for sudden profit-taking at elevated levels.

■ Yen Crosses

Yen crosses remain relatively firm.

EUR/JPY is trading around the low 184 range.

Fading expectations for an early U.S. rate hike are supporting equity markets, while risk appetite is encouraging yen selling.

USD/JPY is under downward pressure due to U.S. monetary-policy expectations. However, as the euro and sterling are rising against the dollar, yen crosses are likely to remain supported.

As long as equity markets hold near high levels, downside in yen crosses is also likely to remain limited.

■ Equity Market

U.S. equities remain firm, supported by fading expectations for a September rate hike.

With concerns over further monetary tightening easing, conditions remain favorable for equity buying.

Some AI-related stocks are seeing corrections due to profit-taking and concerns that previous gains had become excessive.

However, risk appetite remains dominant across the broader market.

Higher equity prices support yen carry trades, helping to support USD/JPY and yen crosses on the downside.

Fading U.S. rate-hike expectations encourage dollar selling, while rising equities encourage yen selling. These forces are therefore likely to offset each other in USD/JPY.

■ Summer Vacation Market

This week, the global summer vacation season has reduced the number of active market participants.

In addition, there are few notable major economic indicators scheduled.

As a result, active position-building is likely to remain limited, with trading focused mainly on relatively narrow ranges.

However, periods of low liquidity can also lead to larger-than-normal moves when unexpected news emerges.

Particular attention remains necessary for Middle East developments and comments related to FX intervention by Japanese or U.S. authorities.

■ Jackson Hole Symposium

The next major focus for markets will be the Jackson Hole symposium in the latter half of next week.

With expectations for a September FOMC policy hold currently dominant, the key issue will be how much the Federal Reserve accepts the market’s current view.

If the Fed emphasizes moderating inflation and slowing employment, expectations for no change could strengthen further, leading to additional dollar selling.

On the other hand, if the Fed highlights the risk of renewed inflation and strongly keeps further rate hikes on the table, the dollar could be bought back.

With few major drivers this week, markets are likely to gradually shift toward position adjustment ahead of Jackson Hole.

■ Middle East Developments

Middle East developments also require continued attention.

If geopolitical risks ease, concerns over oil prices and inflation may decline, potentially reducing expectations for further U.S. rate hikes.

Conversely, renewed military conflict or increased tensions surrounding the Strait of Hormuz could lift oil prices and revive safe-haven dollar buying and inflation concerns.

With few major economic indicators this week, Middle East-related news is likely to carry greater-than-normal importance for markets.

■ Key Points to Watch This Week

① Whether USD/JPY can recover and hold above 159.00
② Whether expectations for a September U.S. rate hike decline further
③ Whether EUR/USD can move above 1.1600
④ Whether GBP/USD can maintain its highest levels since May
⑤ Whether yen selling supported by rising equities continues
⑥ Whether Middle East developments and oil prices become unstable again
⑦ Whether post-intervention caution limits USD/JPY upside
⑧ Whether position adjustment begins ahead of next week’s Jackson Hole symposium

■ Summary

At the start of the week, the FX market is showing relatively calm trading conditions typical of the summer vacation season.

Following the U.S. employment report, last week’s CPI, PPI, and retail sales data were also weak. As a result, expectations for an additional September FOMC rate hike have fallen to just under 30%, while expectations for no change have risen above 70%.

This has placed downward pressure on the dollar, with USD/JPY briefly falling below 159.00.

However, buying interest during USD/JPY declines remains strong. The U.S.-Japan interest-rate gap, yen carry trades, and yen selling supported by rising equities are continuing to support the downside.

EUR/USD remains firm in the upper 1.15 range, while GBP/USD has broken above last week’s high of 1.3562 and risen to its strongest sterling and weakest dollar level since May.

With few major economic indicators scheduled this week, markets are turning their attention toward the Jackson Hole symposium in the latter half of next week.

Calm price action is likely to continue as the base case. However, in thin market conditions, Middle East developments or intervention-related headlines could produce temporarily large moves.