Today’s Market Outlook Dollar Strength Continues as USD/JPY Tests 158 and Intervention Risks

Today’s Market Outlook
Dollar Strength Continues as USD/JPY Tests 158 and Intervention Risks

Market Overview

With Tokyo markets closed for the Silver Week holiday, USD/JPY has remained resilient around the 157 level.

The pair rose to 157.92 during the London morning and has continued to hold near the highs around 157.80. EUR/USD fell to around 1.1407, with the foreign exchange market maintaining a broadly dollar-positive tone.

The US 10-year Treasury yield has risen from around 4.93% to approximately 4.965%, supporting dollar buying through the interest-rate channel.

Meanwhile, NY crude futures remain capped in the mid-US$89 range. Expectations of easing Middle East tensions have reduced the safe-haven bid for the dollar, but the resulting reversal into dollar selling has remained limited.

The key focus for the rest of the session will be whether USD/JPY can break above 158, whether US yields continue to rise and whether flash PMI data shifts expectations for monetary policy across the major economies.

Why Dollar Strength Is Continuing

Dollar strength is continuing despite the significant decline in oil prices.

This suggests that current dollar buying is being driven more by differences in Japanese and US monetary policy, as well as the interest-rate differential, than by safe-haven demand related to geopolitical risk.

The main factors supporting the dollar are as follows.

• The FOMC delivered a unanimous hawkish message
• The possibility of further US rate hikes remains in focus
• Long-term US yields remain elevated near 5%
• Two Bank of Japan board members voted for no change at the latest meeting
• The timing of the next BOJ rate hike remains unclear
• Buying on dips continues to emerge when USD/JPY declines

The BOJ has also raised rates, but markets view the United States as more committed to further monetary tightening. This leaves dollar buying and yen selling, supported by the Japan-US yield differential, likely to persist.

USD/JPY

USD/JPY has risen to 157.92 and is approaching the key psychological level of 158.

The main upside focus is whether the pair can break clearly above 158.

If USD/JPY breaks above and holds above 158, the upside scope could expand towards 158.50 and then 159.00.

However, last week’s rate-check reports remain in focus around 158. Caution over verbal intervention or actual intervention by the Japanese government and the Bank of Japan is likely to make aggressive momentum buying more difficult.

On the downside, 157.50 is the first support level. Below that, 157.00 and around 156.80 will be watched.

As long as US yields continue to rise and USD/JPY holds above 157.50, the underlying bias is likely to remain towards a test of 158.

Intervention Risks

With Tokyo markets closed, liquidity is reduced and smaller flows than usual may generate wider price swings.

Since yen weakness has continued even after rate-check reports emerged, the official response will again come into focus if USD/JPY moves above 158.

The speed of the move matters as much as the price level itself.

A gradual move into the 158 range is less likely to trigger a strong response than a rapid rise towards 158.50 or 159.00.

Thin holiday trading can produce abrupt moves, so caution is required even when following the upside.

Oil Market

Expectations of easing Middle East tensions pushed NY crude futures down into the US$88 range. Prices have since stabilised in the mid-US$89 range, but the upside remains heavy.

Expectations of progress in discussions between Iran and the United States on reopening the Strait of Hormuz are easing supply concerns.

Lower oil prices would normally lead to:

• Easing inflation concerns
• Reduced expectations for further US rate hikes
• Lower US yields
• An unwinding of safe-haven dollar buying
• Dollar selling

However, US yields remain elevated and dollar strength is continuing. This suggests that the FX market is currently placing greater emphasis on the Japan-US yield differential than on oil prices.

If oil falls further and US yields also decline decisively, a more meaningful correction in dollar strength may finally emerge.

EUR/USD

EUR/USD has fallen to around 1.1407 and is trading near the lows around 1.1410.

In addition to dollar buying driven by rising US yields, concerns over the European economy are weighing on the euro.

Flash PMI data for France, Germany and the euro area will be released today.

If the PMI data falls below expectations, expectations for further ECB rate hikes may fade, potentially pushing EUR/USD below 1.1400.

Conversely, stronger-than-expected German or euro-area PMIs could ease concerns over economic weakness and trigger a rebound towards 1.1450–1.1500.

However, as long as US yields continue to rise, rallies in EUR/USD are likely to attract selling.

GBP/USD

The UK will also release its September flash PMI data.

With the Bank of England holding rates steady and offering no clear indication of the future rate path, sterling remains heavy against the dollar.

Weak PMI data would reinforce concerns over a UK economic slowdown and could push GBP/USD lower.

Conversely, strong figures, particularly in the services PMI, could revive expectations for further BOE rate hikes and support a sterling rebound.

US PMI

The US flash manufacturing and services PMIs will be released during the New York session.

Strong results would be likely to reinforce:

• Resilience in the US economy
• Expectations for further rate hikes
• Rising US yields
• Dollar buying

USD/JPY could break above 158, while EUR/USD may move below 1.1400.

Conversely, a significant downside surprise in the US PMI data could lead to lower US yields and broader dollar selling. USD/JPY could correct towards the low 157 range, while EUR/USD could move towards 1.1450.

US Treasury Auctions

Today’s calendar includes auctions of US 2-year floating-rate notes and 5-year Treasuries.

The US$70 billion 5-year Treasury auction will be particularly important.

Weak demand could trigger Treasury selling, pushing US yields higher and reinforcing dollar buying.

Conversely, strong demand at the current elevated yield levels could support Treasuries, leading to lower US yields and a correction in dollar strength.

Even if the dollar moves sharply following the PMI data, traders should be alert to a possible reversal after the auction results.

Yen Crosses

Yen crosses are likely to remain firm on the back of rising USD/JPY and yen selling.

If European and UK PMIs are strong, EUR/JPY and GBP/JPY could extend their gains.

Conversely, weaker-than-expected data could weigh on the euro and sterling, limiting upside in the yen crosses.

If USD/JPY reverses sharply lower near 158, yen buying could also spread to the cross pairs, potentially creating larger moves than in the dollar pairs.

OECD Economic Outlook

The OECD economic outlook will be released today.

Markets will focus on the forecasts for global growth, inflation and the economies of the United States, Europe and Japan.

Significant downward revisions to the global outlook could trigger equity weakness and risk-off yen buying.

On the other hand, a relatively strong US growth outlook could support US yields and the dollar.

Middle East Developments and Politics

Political and diplomatic developments linked to the UN General Assembly will remain in focus.

President Trump has reaffirmed Japan-US unity while adopting a stance towards China aimed at avoiding greater friction.

In the Middle East, progress in US-Iran talks on reopening the Strait of Hormuz is expected.

Progress in the talks could support lower oil prices and stronger equities.

Conversely, a breakdown in negotiations or reports of new military action could trigger a sharp oil rally, safe-haven dollar buying, equity weakness and risk-off yen buying at the same time.

Today’s Economic Data and Events

• France September flash PMI
• Germany September flash PMI
• Eurozone September flash PMI
• UK September flash PMI
• US September flash PMI
• South Africa August consumer price index
• South African Reserve Bank policy decision
• Hong Kong August consumer price index
• US MBA mortgage applications
• OECD economic outlook
• Speeches by European and US central bank officials
• US weekly petroleum inventory data
• US 2-year floating-rate note auction
• US 5-year Treasury auction

Key Points for Overseas Markets

① Can USD/JPY break clearly above 158?
② Will intervention and rate-check concerns intensify near 158?
③ Will the US 10-year yield retest 5%?
④ Can EUR/USD hold above 1.1400?
⑤ Will European and UK PMIs point to slower economic growth?
⑥ Will US PMIs support expectations for further rate hikes?
⑦ Will US yields rise after the 5-year Treasury auction?
⑧ Will oil fall further from the US$88 range?
⑨ Will talks concerning the Strait of Hormuz make progress?
⑩ Will thin trading conditions trigger abrupt market moves?

Expected Scenarios

Continued Dollar-Strength Scenario

If US PMIs are strong and the 5-year Treasury auction sees weak demand, US yields could rise further and dollar strength is likely to continue. USD/JPY could break above 158, opening the way towards 158.50–159.00. EUR/USD would focus on a break below 1.1400.

Gradual Yen-Weakness Scenario

If US yields remain elevated but intervention concerns limit the speed of the USD/JPY advance, gradual yen weakness is likely to continue between 157.50 and the low 158 range. This is currently the central scenario.

Dollar-Correction Scenario

If US PMIs are weak and Treasury auctions are well received, lower US yields and dollar selling could emerge. USD/JPY could move towards 157.00, while EUR/USD could correct towards 1.1450–1.1500.

Sharp Pullback on Intervention Concerns

If USD/JPY rises rapidly in the 158 range and Japanese authorities issue strong warnings against yen weakness or rate-check reports emerge, the pair could fall below 157 in a short period of time.

Summary

USD/JPY has risen to 157.92 and remains near the highs ahead of the key 158 level.

Even though oil prices have fallen into the US$88 range, reducing the safe-haven dollar-buying factor, the reversal into dollar selling has been limited. Current dollar strength is being driven primarily by the FOMC’s hawkish stance and the Japan-US interest-rate differential.

The key focus for the remainder of the session will be flash PMIs across the major economies, the US 5-year Treasury auction and the direction of US yields.

The base case remains a continuation of gradual dollar strength and yen weakness. However, intervention and rate-check concerns are likely to intensify in the 158 range. Even when trading in the direction of a higher USD/JPY, preparation for a sharp reversal is essential.