Euro floats, Yen sprints, Dollar waits: Has the reversal trade entered the chat

Markets are moving like a crew handed Act II without seeing how Act I ends. The U.S.-Japan tariff compromise barely cooled before whispers emerged that Brussels would sign onto the same script—15% duties instead of 25%—which offers some relief to exporters and buoyancy to the risk complex. But the real pulse today is in FX, where the euro is riding high on stale air, the yen’s sprint looks like it needs a breather, and the dollar is coiling under the surface, waiting for its cue.

The euro has risen on a mix of bullish momentum, trade optimism, and strategic silence from the ECB, as well as Trump’s criticism of Powell. However, we may be nearing the part of the play where the background music turns—today’s ECB meeting is expected to be a non-event, with rates steady and guidance unchanged—but currency chatter could still slip through the cracks. Several Governing Council members have already voiced discomfort with the euro's strength. If even a faint echo of that makes it into Lagarde’s remarks, markets will interpret it as a dovish nod.

EUR/USD has likely overshot. With PMIs unlikely to sway sentiment and positioning starting to lean, the setup for a fade is forming. Mean reversion play is already in motion. The market has been far too generous in rewarding euro strength without renewed data support or rate divergence. Anything short of a major surprise today will leave long euro positions vulnerable.

The dollar, for its part, hasn’t played the usual role—ignored during trade drama, unimpressed by resolution. But that may change. It’s not tariffs that move the greenback now—it’s the macro plumbing: labor, housing, and the rhythm of Fed repricing. Jobless claims today could stoke expectations for next Friday’s payrolls. With markets still hanging onto 16bp of easing for September, a strong number today could yank that lower and offer the dollar a tailwind.

This isn’t a story of currencies soaring or collapsing—it’s one of an unappreciated greenback simply waiting for gravity to reassert itself. The dollar doesn’t need to roar back or break new ground; it just needs to stop leaking altitude. A couple of well-placed data prints—claims edging lower, PMIs showing resilience, maybe a nudge in payroll whispers—and the whole balance of risk could quietly tilt in its favor. Markets are crowded into the other side of that trade, and sometimes, it only takes a breeze to push a leaning structure over.

The yen’s rally, meanwhile, feels like a sprint that’s run a lap too far. Up nearly 2% this week, markets are leaning hard into the narrative of BoJ normalization, with 20bp priced in by year-end. That’s a far cry from the 10bp baked in just a few weeks ago. But here too, expectations may be running ahead of reality. With a new prime minister potentially less keen on tightening and Japan’s fiscal ghosts still rattling in the rafters, the yen is looking overbought. USD/JPY feels stretched, and a rebound to the high 147s or 148 could materialize quickly if sentiment flips.

Positioning has taken us to extremes. But with data returning to the stage and central banks back in their boxes, the air is thinning at the top of these FX moves. Momentum is stalling, and where momentum stalls, reversion tends to follow. The turning point may already be underway.