FX Daily Strategy: N America, Jul 31
BoJ largely as expected, minor lift to Sep pricing
Focus will return to Geopolitics
As per forecast, BoJ kept rates unchanged at 1%. It is voted 8-1 with Takata suggesting a quicker response from the BoJ on demand driven inflation. However, the CPI forecast is sending a mixed signal on lowered 2026 CPI and marginally revised higher 2027 CPI. Underlying inflation is showing signs of stabilizing within the target range, anchored by strengthening wage growth. Following the 25bps hike in June, this pause provides breathing room as policymakers reassess the latest geopolitical developments in the Middle East. Renewed Middle East tensions and volatile crude oil prices act as a complex backdrop for the BoJ. While spike in energy costs will once again squeeze household purchasing power, they also exacerbate imported inflation and keep USD/JPY under pressure near multi-decade highs. A temporary pause allows the BoJ to evaluate whether recent oil fluctuations will reignite severe cost-push inflation and if Japanese corporate price- and wage-setting behaviours can continue transitioning smoothly toward a sustainable, demand-driven model.
Market anticipation favours a move in October to keep pace with inflation risks. October’s meeting aligns the expiration of energy subsidies, clearer visibility on how Middle East conflict settle, fresh Q3 real wage data and the release of the updated Quarterly Outlook Report. This gives the BoJ a clean, data-backed runway to think about hiking rates.
On the chart, the intervention plunge reached the April channel and 200-day MA at the 158.00 level before bouncing to reach resistance at 160.50. Higher still, if seen, will see scope to resistance at the 161.00/28 area and possibly 162.00. Consolidation is expected to give way to renewed selling pressure later with support now raised to the 159.45/159.00 area ahead of 157.95 low.
With the weekend close by, market attention will be rerouted back to geopolitical tension. It is looking more likely we are back to the previous week where U.S. and Iran exchange rocket as the pause is broken by Iran's surprise attack.
And where are we heading, is either a land invasion from the U.S. or more infrastructure strike. The latter will be more likely, given the cost of a dragged land invasion. Nuclear option is not on the table but Trump may threaten to use them as the last round of pressure tactics. Trump seems like to be an egoistic man, yet deep down he is a business man. All tactics are leading to producing a beneficial deal for him or the U.S.. Scotched earth with no yield still seems unlikely.
Market participants will very much want to avoid the weekend risk and should see positions being exited on Friday unless there are new headlines.
In the US, we expect a 0.7% rise in Q2’s Employment Cost Index. The final Michigan CSI is also due, and may be weaker than a stronger preliminary release given renewed Middle East concerns.