FX daily: Bank of Japan plays catch-up with the Fed

The Yen has weakened back to summer levels following the Bank of Japan's dovish rate hike. More broadly, we continue to see upside risks for the dollar, with oil prices likely to become the predominant driver in the short-term given the quieter US data calendar.

USD: Oil in driver's seat

Moderating oil prices have taken the edge off the dollar’s post-FOMC momentum. Energy markets may be gaining some optimism that Tuesday’s reported meeting between US President Donald Trump and the Gulf States during the UN General Assembly could yield some clarity about plans for the region. Media speculation also points to Trump nearing a major decision on whether to escalate military operations or pursue an end to the conflict. Even so, we do not see these developments as enough to take Brent back below $100/bbl at this stage.

We still see upside risks for the dollar as the Federal Reserve’s hawkish message on Wednesday has, in our view, given the green light to markets to fully price in a hike in October if data and energy prices suggest so.

Looking ahead to the next few days, we note that this is typically a cyclical lull period for top-tier US data releases. Today, industrial production and the leading index for August shouldn’t attract much market attention, and the calendar is rather light next week. That leaves oil prices as the main market driver into month-end.

Fedspeak will also be watched, although the dot plot seemed clear enough in signalling the Fed is planning to hike again this year. Off-meeting remarks by FOMC members will become more relevant after September’s data releases.

EUR: ECB speakers still hinting hawkish

European Central Bank members have resumed public appearances, with three policymakers delivering policy-related remarks yesterday. The tone remained broadly hawkish. Neutral-to-hawkish Gabriel Makhlouf said every meeting is a "live" one, leaving the door open to an October hike; Ante Zigman, who is considered somewhat more hawkish, stressed the resilience of growth and the need to bring inflation lower. Olli Rehn, one of the Governing Council's most dovish voices, was unsurprisingly more neutral but did not push back against market expectations. It confirms the dovish camp is weak at the moment.

One notable point was that all three policymakers said there is no evidence of second-round effects. That remains somewhat inconsistent with the prevailing hawkish narrative and guidance. Even so, we do not expect any shift in tone in the near term.

This is one reason not to chase EUR/USD lower too aggressively from current levels. At the same time, front-end USD rates could still move higher in the coming weeks, particularly around key data releases, while the broader commodity and risk backdrop continues to point to downside risks for EUR/USD.

President Christine Lagarde speaks later today, but it is difficult to see her adding much to the message so soon after the meeting. A test of 1.140 remains the near-term risk, although our base case is for some stabilisation today.

JPY: Dovish hike leaves the yen exposed

The Bank of Japan has raised its key rate by 25bp to 1.25% in a split vote, with Toichiro Asada and Ayano Sato dissenting. Japan’s core inflation measure remained above 2% throughout 2025, and the BoJ expects inflation to stay above target in the coming years. The decision therefore acknowledges persistent upside inflation risks. However, Friday’s data showed inflation easing slightly in August, partly because of subsidy-related distortions. The two dissenting board members, appointed by Prime Minister Sanae Takaichi, argued that without a renewed pick-up in inflation, a rate hike at this meeting was unnecessary. Their dissent could make it harder for the board to reach consensus on another hike this year.

The yen weakened to 157.11 against the dollar, around one yen above its pre-decision level, as the statement offered little additional hawkish guidance to support bullish JPY positions. The dissent from Asada and Sato points to resistance against the fastest pace of rate increases in more than three decades and suggests they may increasingly act as a brake on further tightening.

Today’s dovish surprise also underscores the high bar set by the Fed this week. We continue to see upside risks for USD/JPY, with a move back towards 160 possible in the coming weeks if oil prices remain elevated and the Fed hikes again as early as October.

CZK: CNB remains relaxed but later turn should support FX again

The Czech National Bank yesterday left its policy rate unchanged at 3.75% in a unanimous decision. The CNB press conference struck a dovish tone relative to market pricing, as expected, but signalled a "no-change" stance compared to the August meeting. The CNB Board remains open to further rate hikes yet sees no need to rush at this moment. However, our economists changed their forecast from unchanged rates to a hike in November, given our upside revision in the Czech inflation forecast and elevated global energy prices.

While the initial market reaction was dovish, rates ultimately ended the day unchanged from pre-decision levels. The CNB outlook remains a mixed bag; four rate hikes are still priced in, and the yield curve saw only slight steepening. Looking ahead, we anticipate the CNB adopting a more hawkish stance in the coming weeks and months. This should shift the curve from steepening to flattening and support the currency.

EUR/CZK briefly touched 24.350 yesterday but closed lower. For now, the 24.300–24.350 range appears fair, though we expect a stronger US dollar to push the pair higher in the coming days. However, September inflation data, due in early October, could mark a turning point; headline figures exceeding the CNB’s forecast for the first time in a while might trigger more hawkish commentary from the central bank.

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