- USD/JPY needs interventions and rate hikes.
- Monetary policy divergence is pushing EUR/USD lower.
The US dollar found no clues in Kevin Warsh's comments and attention turned to the US labor market report for June. The Federal Reserve chairman highlighted a reduction in inflation risks and reaffirmed the central bank's commitment to bringing inflation back to the 2% target. He did not rule out a rate hike in July.
Investors interpreted Kevin Warsh's comments as hawkish, raising the probability of two rate hikes in 2026 to 46%. The odds of a tightening of monetary policy in September are estimated at two in three.
This divergence favors the bears, as there is a division within the ECB. This reduces the likelihood of an increase in the deposit rate. Hawks believe inflation is permeating all sectors of the eurozone economy. It will manifest as increased demand for wage increases and a delayed increase in food prices. On the contrary, the pigeons believe that, due to the drop in oil prices, the CPI has already peaked and will fall.
This is confirmed by the latest report, which confirms a slowdown in inflation in June, from 3.2% to 2.8%. The futures market is pricing in the possibility of a deposit rate hike in 2026. However, investors believe that if there is a tightening of monetary policy, it will be the last of this cycle, which is holding back EUR/USD buyers.
In Japan, rumors are intensifying that the weakening of the yen could accelerate the process of raising the overnight interest rate. The market previously expected the Bank of Japan to tighten monetary policy every six months, but has lately estimated a 60% chance of another increase in October, following the June increase. The combination of a weakened national currency and strong business activity carries the risk of a significant rise in inflation. If the central bank allows inflation to get out of control, it will be forced to resort to aggressive monetary tightening.
Meanwhile, Mizuho Bank expects to reach 170, Sumitomo Mitsui Financial Group expects it to reach 180, while Monex Group and Blue Edge Advisors do not rule out a rally to 200.
The yen has recovered from its 40-year lows following comments from Atsushi Mimura, Deputy Finance Minister for International Affairs. He stated that previous monetary interventions in April and May were justified and that the United States has no objections to further interventions in the currency market.
He FxPro Analyst team
