Calm before the inflation storm

The markets have seemingly caught their breath after the recent wild swings, with USD/JPY chilling around the 145.50-147.50 zone—a sweet spot we flagged last week that better mirrors the current rate differential landscape. The yen’s now dancing more to the tune of US rates as the BoJ looks set to sit out the next few rounds of rate hikes. As those US rates cut edge closer, expect the yen to keep flexing its muscles.

Right now, Asian and cross-asset markets are enjoying a sea of calm before the inflation storm. But don't get too cozy—there's plenty of drama brewing. Federal Reserve Governor Michelle Bowman recently pointed out the progress on inflation, but not without a side note about lingering risks from fiscal policy and global tensions. But she also hinted that if inflation gets back to that magical 2% mark, there’s room for some gentle monetary easing to keep policy from squeezing too tight.

Markets are still betting on 100bps of US rate cuts this year, with another 100bps lined up for next year. That’s a major shift in expectations, which has put the US dollar on notice. With Powell’s Jackson Hole gig coming up, followed by what could be a high-stakes FOMC meeting, stock market bulls are hoping to get lavished in dove.

Meanwhile, thanks to the global maelstrom, the yen’s recent wild ride has got BoJ officials a bit jittery. We reckon they’ll let the dust die before making any moves. For now, it’s all about them sitting back and watching the Fed rate cut show unfold.