EUR & JPY – All You Need to Know

EUR: Becalmed the EUR/USD pair is currently exhibiting tight trading ranges, influenced significantly by US Treasury yields and USD/CNH movements in the relatively quiet summer market conditions. The short-term range appears to be fluctuating between 1.0850 and 1.0930, and a substantial breakout might not occur until the release of flash PMI readings for August, expected today.

In terms of tightening expectations, the market is presently factoring in only a 20 basis-point increase in interest rates by the year's end, possibly underestimating the likelihood of a more substantial 25 basis-point ECB rate hike in September. The economic data schedule for the eurozone is relatively light except for the PMI’s. Nevertheless, amidst the prevailing pessimism in the eurozone, there is potential for an improved monthly current account surplus reading, likely to fall within the range of EUR10-20 billion. This is noteworthy as it stands in stark contrast to the considerable EUR35 billion monthly deficits observed a year earlier, when surging energy prices exerted downward pressure on the euro.

As well, the European currencies exhibiting higher volatility, such as Norway's krone and Sweden's krona, continue to be influenced by elevated US interest rates. The prospect of any potential support for the krona from the upcoming Swedish Riksbank meeting (scheduled for 21 September) seems distant, indicating that EUR/SEK might hover around 12.00 in the interim.

JPY: In the intervention zone the USD/JPY pair has comfortably settled within the 145-150 FX intervention zone, a range in which the Bank of Japan (BoJ) conducted a $70 billion sale of USD in the prior September and October. Presently, it appears that Tokyo authorities are choosing to hold off, refraining from countering the rise in USD/JPY driven by US Treasury yields. Additionally, the relatively orderly market conditions play a role in deterring FX intervention at this juncture. The one-month USD/JPY trading volatility remains below 10%, a notable difference from the 14-16% levels observed during the BoJ's intervention last year.

In essence, it can be inferred that immediate FX intervention is unlikely, and a more substantial trigger for a JPY rally would likely hinge on a pronounced correction in risk assets, possibly fuelled by the surge in US Treasury yields.

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