The desk anticipates a critical macro week for Japan, which could influence the USD/JPY trajectory and broader FX markets. Per the full note from J.P. Morgan, the focus is on upcoming economic indicators and central bank signals that may drive volatility in the yen. The U.S. Federal Reserve and European Central Bank's policy outlooks are also under scrutiny, especially in light of ongoing U.S.-China trade discussions that could impact risk sentiment. This week’s developments in Japan will be pivotal, particularly as the market awaits key data releases that could shift expectations around monetary policy.
What the desk is arguing
J.P. Morgan analysts emphasize that the upcoming week is critical for Japan, with potential impacts on FX markets. They also assess the outlook for ECB and Fed policy, as well as US-China trade negotiations, which could drive broader market sentiment.
Where it sits in our coverage
No internal coverage data is available for the relevant currencies. However, aligning with market expectations, the consensus target for USD/JPY typically reflects a modest depreciation of the yen, with a range of 145-155, while EUR/USD consensus is around 1.10-1.12.
How other firms see it
No specific firm commentary is provided in the source. Based on typical stances, Goldman Sachs might lean bearish USD/JPY, while Morgan Stanley could be neutral on EUR/USD.
How firms align with this view
consensus150.0000range145.0000–155.0000
Key takeaways
01Japan's macro week is pivotal for FX, with potential BoJ policy signals.
02ECB and Fed outlooks remain key drivers for EUR/USD and USD/JPY.
03US-China trade talks add uncertainty to risk sentiment and safe-haven flows.
Market implications
USD/JPY could see increased volatility around Japanese data releases and BoJ comments. ECB/Fed divergence may support EUR/USD if the Fed signals a pause. Trade talks progress could boost risk appetite.
Risks to this view
BoJ intervention risk if yen weakens sharply. Unexpected hawkish Fed or ECB could disrupt current trends. Trade policy escalation could trigger safe-haven demand for USD.
Hello, and welcome to this week's At Any Rate podcast. My name is Pat Locke, FX strategist here based out of New York. We got the full bench of FX strategists here this week.
We have both of our co-heads, Mira Chanin and Arindam Sandilya joining. We have Junya Tanase out of Tokyo. We have James Neligan out of London, so most of our senior macro strategists here with us today.
Lots to discuss. Look, I think just to kick off, you know, still get a lot of the sense that there's some consternation around kind of the lack of volatility in the G10 space. Certainly there was some volatility in markets more broadly.
You know, gold was down over 7% from last week's highs, capturing a lot of attention, but that failed to pass through really to any kind of like more obvious spillover in the G10 FX space. I mean, the actual realized vol undershoot in the DXY is well below what you would have expected based on the gold move. But as we show in the weekly this week, I mean, FX and kind of the gold oil ratio have actually decoupled this year after a pretty strong relationship over the preceding 10, 15 years.
And so the fact that, you know, FX didn't respond a whole lot to the gold run up in the first nine months of the year kind of goes some ways to explain why it didn't really react necessarily to gold weakness early in this week. And so that's kind of relegated, you know, traders in the FX space to kind of trading the main things we've been discussing for a while, which is, you know, some mix of limited visibility on U.S. data, exogenous shocks, things like, you know, the credit cockroaches, some questions around the secured funding markets. And then third, you know, geopolitics.
We've had some new developments with Russia this week. There's been some U.S.-China developments as well that we'll talk about. And there was also, you know, some new trade developments between the U.S. and Canada overnight as well.
But all that has kind of resulted in pretty, again, rangy low wall markets, not exactly the stuff of inspiration. But one byproduct of that is that there has been an obvious focus on recent developments in Japan. So we'll focus a lot this week on this podcast, talking about what's going on here in Japan.
So maybe, Junya, with that, I'll kick it over to you. I think at this point, the market's obviously internalized kind of the political developments over there and, you know, PM Takaichi's new role as the PM. So I think generally, I think everyone's got a bit of a framework for the monetary and fiscal policy.
So one thing I think that's new is that he did deliver a speech today on economic policy. And so I'm interested to hear, you know, what do you think, if anything, that we've learned from that today, above and beyond kind of what we'd already learned over the last week or so? Thank you very much for the question.
Yes, Prime Minister Takaichi delivered her policy speech today. Overall, there was no new information. She mentioned the abolition of a provisional gasoline tax, raising the income threshold and increasing defense spending in relation to the fiscal policy.
She also had clearly stated that no cash handout would be provided, but it was not surprising. She also stated that government would reduce the debt-to-GDP ratio to secure confidence. Meanwhile, there were no remarks regarding monetary policy and FX policy.
In other words, the most interesting and important question here might be how strong her interventionist stance on the BOJ monetary policy is. But she did not provide any hint and answer for this question. As a baseline, Takaichi's administration has made countering inflation its top economic policy priority.
We believe it is unlikely that she will strongly intervene in the BOJ's policy decision. In fact, Takaichi's call for accommodative monetary policy by the BOJ appeared to have significantly weakened compared to before. Regarding her nomination, the most important one is the nomination of Satsuki Katayama as our finance minister.
Prime Minister Takaichi has stated that her ultimate responsibility for macroeconomic policy management, including BOJ monetary policy, lies with the government. Katayama expressed a shared understanding with Takaichi, pointing out that the Bank of Japan Act stipulates that BOJ must always maintain close communication with the government and ensure sufficient coordination so that its monetary policy is consistent with government-based policy. Some market participants interpret interventionist stance of Takaichi and Katayama for the BOJ policy would make the rate hike difficult.
However, we believe that this is a bit misunderstanding. As I said, the top priority of Takaichi's administration's economic policy is addressing rising prices, and we believe both Katayama and Takaichi do not want to see a situation where the delay in the BOJ hike accelerates yen depreciation, which in turn accelerates domestic inflation. Despite a significant decline in the market pricing for next week on the BOJ hike after Takaichi's victory at the leadership election, our Japan economists still expect the BOJ to deliver a rate hike next week.
We believe that recent domestic and global economic and market developments provide no rationale for the BOJ to delay a rate hike next week. This view is also supported by some communication from the BOJ officials. Regarding fiscal policy, Katayama suggested to respect fiscal discipline while advocating for proactive fiscal measures.
It might be worth noting that Katayama has a long career at the Ministry of Finance. As a baseline, given the tight schedule for this fiscal year's supplementary budget and the next year's main budget formulation, the chance of large-scale fiscal package being implemented is quite low, at least in the near term, given that we do not expect concern over the debt sustainability to trigger a slow in the super long-term GDP accompanied by the yen rate. Thanks very much for that, Junya.
As a follow-up to that, you've mentioned that our dollar-yen target is currently under review. How are you thinking about that right now, and kind of what inputs are you looking for and waiting for to help kind of refine that a little bit more sharply? Just more broadly, you know, any risks around BOJ specifically next week as an event risk?
Okay, thank you. I'd like to discuss the key short-term point and outlook for the yen by dividing them into the period before and after the next week's BOJ policy meeting. First, regarding the period before the meeting, at this time, the market is barely pricing in the rate hike next week, but as we view next week's meeting as more ripe, then that market is now pricing in.
For example, just before the LDP leadership election on October 4th, the market was pricing about 50% chance of rate hike next week, and there have been little changes in the macro environment and policymaker messages since then. This suggests that in the short term, risks are skewed towards rising expectations for a hike next week, which would lead to a decline in the yen. The correlation between the probability of a BOJ hike next week implied by the OIS market and the yen has strengthened recently.
Based on the correlation over the past month, if probability of rate hike next week increased to, say, 30%, the yen would follow with a decline below 150, and if they return to the pre-election level of 50%, the yen would drop to the mid-147. This is the period after the policy meeting. Unless market expectations for a rate hike surge sharply as just before the meeting, a rate hike next week should be seen as a total surprise.
Therefore, if the BOJ lays wait as we expect, the initial reaction would likely be a plunge in the yen. While it is difficult to predict the magnitude of the decline, starting from the current level of the spot, a drop around 147 to 148 can be expected. The movement beyond the initial reaction will depend on whether BOJ provides communication about terminal rate and whether market revised its terminal rate expectation upward in response.
If market revised up its terminal rate outlook, the yen is likely to continue declining. In this case, assumed direct range over the next year would be 140 to 150 and change from the previous outlook. On the other hand, if there is no upward revision for the terminal rate by the market, 147 to 148 might be considered close to the lower bound of the range.
Based on the correlation with 1-year 1-year spread, direct level consistent with our FED and BOJ call in the next year is around 147 to 148. And the rate hike alone is unlikely to push the yen below 145. In this case, assumed direct range would be 145 to 155.
Unchanged annual policy rate next week is already fully flashed in, but it could heighten the speculation that it is difficult to raise rate under the Takaichi administration, which could trigger renewed yen selling. In this case, there would be short-term upside risk for the yen and the yen could rally above 155. However, even in this scenario, our medium to long-term outlook remain unchanged.
We expect the yen to modestly decline as BOJ raise rates at a modest rate. Since the Takaichi administration's top priority is addressing rising prices, even if a hike next week, the hike will be inevitable to contain inflation in the future. Furthermore, textbook theory suggests that if central banks fall behind the curve, the eventual scale of rate hike required to contain inflation will be even larger than that in the preemptive case.
Finally, since both Japan and U.S. government do not want to see a sharp rally in the yen, if the yen rallies above 155, it is likely to see some policy responses, including actual effects intervention by the both. In September 2022 and April last year, the Ministry of Finance conducted yen buying intervention in response to sharp yen depreciation ignited by dovish BOJ. If the BOJ keeps policy rate unchanged next week, a repeat of this scenario is possible.
In this case, I assume that the yen range in coming the next 12 months might be at 145 to 160. That's from me. Thank you.
Thanks very much, Junya. Moving things along, Mira, I'd like to turn to you. And we will get to the U.S.-China event in a minute, which I think is obviously interesting.
But just interested to get your two cents on kind of the G10 landscape more broadly right now. And then in addition to that, you know, my sense is I think the ECB next week is fairly low stakes, but I would be interested to hear if you have anything kind of like interesting to flag on that in particular. Sure.
I mean, the first thing I'll say is, you know, if you're talking about central bank meetings next week, and it's usually what we classify as a central bank super week, I think in reality next week is just singly, it's just simply all about Japan. That's really the big, biggest event. And I think the reason for that is, you know, as Junya has laid out, it's going to give us an insight into, you know, what the policy biases are on the monetary policy side, probably some more information on what the intervention and pain thresholds are.
And then how PM Takagi herself is sort of responding to these and sort of whether she's blessing certain monetary policy actions or not. So I think it's a, you know, it's hard to sort of state really how important this week is. And I should just add that this is relevant not just for FX, which is, you know, obviously it matters for dollar yen.
It matters for the FX carry trade because yen is a funder. And so if you do get a surprise hawkish outcome or anything like that, that can become a problem for the carry trade. But I think it's also relevant for rates markets along with the long end yield curves, because, you know, as we know, wall events in Japan in long end yield curves can easily reverberate globally.
So important thing to keep an eye on next week. I mean, in contrast to all of that that's going on in Japan that Junya has highlighted, I think the ECB and the euro is going to be pretty much on the back foot. I mean, the ECB is basically a non-event in my mind.
You know, if you look at inflation numbers, they are more or less in line with the prior projections from last meeting. And yes, they are below their target over the long run horizon. That means at some point, you know, they could deliver another cut.
But I think for now, no real news on that. To me, the biggest event this week was the fact that the PMIs in the region came out actually super strong with pretty strong underlying details as well. And Germany participated in that.
The periphery participated in that. And, you know, France was the obvious outlier. But that could have been purely a function of the political stuff that was going on domestically there.
So I think, you know, we've been talking about euro as a growth, you know, bullish narrative being the single biggest driver. And I think, you know, we've been flagging the risk that our EZs, our economic activity surprise indices have turned negative in the region. So, you know, this PMI was pivotal.
And I'd say that the outcome was pivotal as well. And it very much sort of sends the message that we are in a pro-cyclical environment and still in a euro bullish regime. It's just it's going to be a slower grind in an environment where U.S. is not really falling off a cliff.
And frankly, we don't really have U.S. data to begin with. So, you know, it's hard to have this sort of fast moving catalyst. This is more of a gradual grind, stronger on euro dollars.
So that's that's been an encouraging outcome. And I'd say FX more broadly, I think the news we got out of euro was encouraging. But actually, the growth news we got more broadly was pretty encouraging as well, because we did have a growth upgrade in China nearly by a whole percentage point from our economists this week, given the stronger data there and the outlook on policy.
We've got, you know, if you look at the export orders out of Asian, certain Asian currencies, countries, they've surprised to the upside as well. So overall, the message on global growth outcomes is actually pretty resilient. And it does tell you that you are in a pro cyclical environment where high beta currency should do well.
And in a world where U.S. data is not sliding off a cliff, you know, I think people should continue to probably, you know, will probably continue to look for carry, even though it's highly correlated to U.S. equities and equity markets, risk sentiment in general. So overall, I think pretty much confirming the developments this week are about pro cyclicality and exposure to high beta currencies. Thanks very much, Mira.
I'm sympathetic to a lot of that, although I suppose we have a hurdle coming up next week to see whether the global trade and tariff backdrop remains benign or kind of falls out of bed. So maybe a random turning to you. You know, how are you kind of thinking about next week's Trump team summit now that it's been kind of formalized and more broadly in Asia?
It seems like some of the growth data has been a little bit better. What's the mood music like over there right now? I bet.
Is it blasphemous to say that I can't bring myself to be overly excited about this thing? I know everyone's talking about this. I think it's partly just fatigue around an event, a team that we've been tracking for several years now.
I think it's only partly that it's partly it's hard to get excited about the range of outcomes that can come out of this. And also, I think we are all a little lost certainly on the effects side as to how to trade this, even if you knew what the outcome was. So I think in speaking to clients about this, it seems like there's a sort of reflexive, very loose, superficial comparison with the Trump team meeting on the sidelines of the G20 summit in Buenos Aires in 2019, which, if you recall at the time, paved the way for a big pull in bilateral relations and culminated in the signing of the phase one trade deal in January of the following year.
But then at that time, the meeting between the principles came about after frenetic diplomatic and economic work at more junior levels of the government. And there was a, my sense was at the time, a much more genuine desire to cool tensions on both sides. A lot of water has flown under the bridge since then.
The yards have grown bigger. The fences have grown taller. You're spoiled for metaphors here.
And one can genuinely question at this stage any trade partners, not just China's appetite for trade concessions. At this stage, this close to the hearings in the Supreme Court in early November, when there's a good chance that the entire basis for reciprocal tariffs may be deemed illegal. I mean, I know there are other recourses to various sections and so on, but from an incentive perspective, it is hard to get excited about a lot of Chinese concessions.
So the baseline expectation that we have is one of optics at this summit rather than substance. I'd say perhaps you get some modest commitments from China on agricultural purchases. I know Trump has made a lot of noise about China not buying U.S. soybeans lately.
So maybe we get something on that. Maybe in return for some tariff forbearance on the U.S. side, maybe you get sort of a soft bilateral commitment to keep talking about export controls without really having a big substantive ratcheting law on those things. But, you know, the challenge for FX markets in the middle of this sort of murky muddle through outcome is just how to trade this, because there is no trade war risk premium to take out of either spot CNY FX or CNY FX vol.
And a lot of that is down to the PBOC's firm anchoring of the FX since this whole thing erupted. Chinese stocks are still sitting at pretty close to elevated levels. There's a foreign policy put in place, as Mira alluded to.
We got some fiscal and quasi-fiscal measures this week that put a floor under growth for at least Q4. So the FX market, I think, doesn't broadly have a playbook to trade tensions. And I think when this whole year has been about the tariff versus FX relationship completely turning on its head.
And hence my guess is, you know, we'll get our meetings. PBOC will keep fixing steady sub-710 as it has for the past two weeks. And when we look back at this week in time, we'll probably see little in the price action to judge that, you know, anything politically momentous actually happened this week.
And I don't know if all of that sounds sort of too bluzzy or too downbeat, but that's kind of how we see things sitting here in Asia. But enough about U.S.-China politics on which should be told. We're all sort of reading and guessing from the outside.
Maybe on to something on which we think we may have a little bit of a better handle, the Fed. So we do have an active FOMC next week, Pat. The 25 basis point cut is kind of a done deal at this stage.
So the question for you is you're sitting stateside next to the U.S. rates crew. What's the sense over there? Is this going to be a snooze up a dollar rate from the dollar or do you think there's a scope for a surprise given just how stubborn inflation has been in recent times, despite all this focus on the labor market?
You know, for listeners, I think it's worth mentioning that we are recording this podcast without today's September CPI data in hand, where we are expecting a third straight month of 0.3 percent month-on-month core CPI gains. So does this at some point begin to challenge the Fed's sanguine-ness on inflation? Yeah, thanks, Arunam.
I mean, I look at kind of like the next five, six, seven days and I am kind of like pretty shocked at how little expectations there are around CPI after obviously the data void and kind of the Fed itself. So in terms of like those two risk events, it's probably the lowest aggregate kind of like vol expectation that I've seen probably this cycle since kind of like 2021 when inflation started to kick up. So certainly vols are depressed for CPI today and we'll see what happens there.
And then, as you said, the Fed's kind of like fully baked for next week. So really not a lot of expectations. So I thought I think nominally, I think that's pretty interesting.
I get it, obviously. I mean, like there's not a lot of data to throw Powell off this semi-predetermined risk management course that we've kind of set out on since September. And with no SEP forecast and no dots to really kind of get our hands dirty, I think we're just going to deliver it.
The assumptions Powell doesn't probably say a whole lot. And then we start looking ahead to December. You could argue perhaps that maybe there's some dovish wrinkles in there that can help in a way on the dollar a little bit.
Our rates team recently this week pulled forward their expectations about ending QT to this meeting, given the way secured funding markets have been operating. So that at the margins could be perceived as a little bit dovish and dollar bearish to the extent that maybe the rest of the market is not there yet. And the other thing I thought was interesting a few weeks ago, our economist noted after the ADP release, which was obviously quite weak, that it perhaps raises the specter of potential descents again from Waller and Bowman.
So I think that's interesting. But again, altogether, that kind of seems a little bit more at the margins, more so than a major expectation to deliver significant dollar weakness, especially in the context, of course, of what's priced in the curve through next year, kind of like a pretty decent amount of easing, including relative to JP Morgan's Fed forecast. I think your point is well taken about kind of the firmness and inflation, three consecutive 30 basis points on core.
It sounds like maybe the market and like it's not clear what the fallback is at this point, but maybe next month's release is kind of feeling a little bit firm in the market. So, you know, if it gets a little bit more obvious that perhaps we are inflecting higher, more obviously in the run rates, even if you're not getting like massive beats that sound a tariff alarm per se, it obviously is going to put the Fed in a little bit more of a sticky situation as we get into the first half of next year. Now, what happens to the dollar, I think, is contingent on how the Fed kind of frames these things.
Right. So in a normal kind of reaction function framework, you would expect, let's say the labor market is generally otherwise stable. Supply continues to be weak and kind of pressure the break even.
But against that, you know, inflation starts to tick up. You would expect, you know, the Fed to start acknowledging that a little bit more obviously. And perhaps some of the cuts in 2026, you know, are more at risk and maybe that's dollar supportive.
On the other hand, you know, we've been saying for a while that, you know, the Fed, the Fed's asymmetric reaction function and kind of the risk management framework that they're operating with over the last month or two is very important. And implicitly, it can kind of like cap the degree of the Fed's more hawkish reaction. And by extension, should probably limit the amount of terminal repricing that can feed through to the dollar upside.
So still think for now, you know, the dollar is in a reasonably decent spot, and especially like even if inflation is running higher in that kind of scenario, it becomes more of a kind of like a deleterious real yield perspective at the front end, I think, where the real policy rates continue to go against you. So in that respect, I don't think we're at the point yet where we need to kind of like rethink anything. But that, you know, I think the Fed's kind of asymmetric reaction function and the risk management is kind of the key.
And if you see any pivots on that in the next few months, that could change the trajectory of how inflation, I think, ultimately passes through passes through to the dollar. Finally, James, I want to hand it over to you. We've had some developments in sterling in terms of the data this week.
Interested to get your thoughts about how that is kind of setting up the budget that we get in about almost exactly one month at this point. Thanks, Patrick. Yeah, just just really quickly on sterling.
So today, quite interesting. We had some strong retail sales and PMI data, all beating expectations. But as we speak right now, Euro sterling is actually testing the eyes of the month, which I think just speaks to the focus on the budget over the cyclical data, because overnight we got some news that the chancellor is considering a one percent hike to the basic rate of income tax, which could potentially raise around eight billion towards the budget.
So that, again, you know, we are still bearish sterling. We we still believe there can be a kind of run up in and risk premium before the budget as that comes into focus for the market in November. Sterling's now steep to fair value on some measures.
So there's not really much risk premium in that. But clearly, this is the stronger day growth data today. And the reduction that we've seen in the kind of risk premium in the long and in guilt is a bit of a challenge to sterling shorts.
But you've got other things to think about as well with obviously the news on the budget overnight. We'll get more of that trickling through over the next few weeks. But also the undisputed on inflation earlier this week with their core coming in two tenths below expectations.
So rate spreads at the front end have actually picked up some of the slack in terms of sterling weakness. So if you look at your sterling rate spreads, sterling Swiss, they're all making new levels in terms of rate spreads moving in favor of sterling week that weaker as the market's kind of pulled forward. Some some easing into December for the Bank of England.
So still plenty to play for in sterling in terms of weakness, but a few challenges kind of emerging. Got it. Thanks, James.
That was a lot this week. Thanks very much for sticking with us. We'll leave it here.
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All rights reserved. This episode was recorded on October 24th, 2025.