FX daily: US holiday offers Japan intervention window

The dollar has retained its post-Fed gains, keeping USD/JPY well bid. Today’s US holiday may offer attractive liquidity conditions for new JPY FX intervention. In the UK, Andy Burnham secured a parliamentary seat and is widely expected to become the new Prime Minister in coming months. We have published a new EUR/USD forecast, expecting 1.18 by year-end.

USD: Eyes on USD/JPY given US holiday

The dollar’s momentum remained strong for a full session after Wednesday’s hawkish surprise. Overnight, DXY tested levels above 101.00, on track to have its best week since April 2024. We aren’t at all convinced this is the start of a broader USD appreciation cycle. The US-Iran peace deal removes a bullish argument for the dollar, and our macro team still thinks markets are overestimating the chances of a Fed hike. But in the near term, the dollar may enjoy post-Fed enthusiasm for a bit longer, with markets probably keen to fully price two hikes by December at the first strong data print (39bp currently priced in).

In the coming days, focus will turn to Fedspeak and how strongly FOMC members are willing to back the hawkish dot plot. With forward guidance removed, markets have more room to reprice aggressively as US data are released, increasing the risk of volatility in both rates and FX.

Today’s US holiday creates a lower-liquidity backdrop, a window during which Japanese authorities have previously shown a preference to intervene. USD/JPY is already deep into intervention territory after breaking above the 2024 highs yesterday. A lack of intervention today would leave scope for speculators to push towards 162-163 given the supportive USD environment.

EUR: We have updated our forecasts

We have published a new baseline and two alternative forecasts for EUR/USD, along with our updated scenarios for oil, gas, inflation and rates in the US and eurozone. We do see some upside risks for Brent after a potentially overdone selloff, but still expect it to stay below 90$/bbl in the third quarter, allowing FX to keep desensitising from energy prices. In line with our dovish Fed call (no hikes) relative to pricing, we are expecting USD depreciation in the third and fourth quarters, albeit at a moderate pace. Our new year-end target for EUR/USD is 1.18.

Yesterday, ECB Chief Economist Philip Lane suggested the new neutral rate may be 2.50%, effectively suggesting another 25bp hike would still fall short of restrictive territory. But that is hardly surprising for a market that has been fully pricing a 50bp+ tightening cycle almost uninterruptedly since mid-March.

We are in an environment of rapidly shifting correlations, with oil prices becoming an almost irrelevant driver and Fed rate expectations aggressively taking over. That reduces the explanatory power of valuation models, although it’s still worth mentioning that ours returns a 1.160 short-term fair value for EUR/USD. But for now, EUR bulls will likely be content if the pair holds above 1.140.

In other European markets, we had two rate holds in Switzerland and Norway yesterday. We still expect the Swiss National Bank to keep rates at 0.0% for at least another two years, while we forecast a 25bp Norges Bank rate hike in August.

GBP: Burnham widely expected to become new PM

Mayor of Greater Manchester, Andy Burnham, has secured a parliamentary seat – and therefore a path to bid for the role of Prime Minister – after winning the Makerfield by-election as widely expected.

In the coming days, we might already see some cabinet resignations aimed at pressuring PM Keir Starmer to step down and speed up a transition to Burnham. The alternative is a lengthier leadership challenge. Anyway, betting markets – and likely the investor community – have a very high conviction that Burnham will become PM by the end of the summer.

The lack of any political risk premium in the pound over the past month suggests markets have grown increasingly assured that Burnham won’t upset the gilt market with his fiscal plans. Still, the bar has been low since 2022 for GBP and gilts to react negatively to fiscal headlines, and we are adding that as an upside risk in our generally bullish view on EUR/GBP. Still, our view rests primarily on our call for no Bank of England hikes, with yesterday’s rather uneventful meeting reinforcing our conviction.

CZK: CNB hiked rates for first time since 2022

The Czech National Bank board voted six-to-one in favour of a rate hike yesterday, taking the policy rate to 3.75% from 3.50%, in line with expectations. The governor's press conference did not provide too much guidance on the next meeting, and we did not hear any specific reasons for why the CNB hiked rates – though its focus is clearly on core inflation and credit growth. Our baseline is that the CNB is now done, but the bar for another hike appears relatively low. Core inflation in June and July will probably be decisive for further policy decisions and for markets, even as headline inflation is expected to fall below 2% in June.

The market reaction was rather muted, but if anything, somewhat dovish. The governor was perhaps hawkish compared to recent press conferences but dovish relative to market pricing. The market is still pricing in one more hike in the coming months. However, the entire curve flattened further, and we expect this trend to continue. EUR/CZK was driven more by a stronger US dollar yesterday after the Fed decision, but the koruna still managed to outperform its CEE peers. This outperformance should continue relative to Poland's zloty in the coming weeks, but it seems it is not enough for the koruna to test levels below 24.100 for now, as we had expected previously.

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