The dollar-yen exchange rate continued its upward trajectory

briefly revisiting levels above the 147-yen threshold.

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“Dollar-Yen Surge Continues - Brief Return to November Highs”

In the current dynamic foreign exchange environment, the dollar-yen exchange rate maintains its upward trajectory, briefly revisiting levels above the 147-yen threshold. At one point, it surged close to 147.95 yen, marking a temporary resurgence to levels not seen since November of the previous year. While there is a sense of caution in the upper echelons, it is evident that the march toward the formidable 150-yen mark is steadily unfolding. Although market participants remain watchful for potential currency intervention by the Ministry of Finance, some voices suggest that, given the current pace, such intervention may be improbable.

Reports indicate a disparity between the statements made by Governor Ueda and the market’s interpretation thereof. In an interview with the Yomiuri Shimbun, Governor Ueda mentioned, “There is a chance that we could obtain sufficient data to assess a positive feedback loop between wages and inflation by year-end.” While the market had been attentive to the possibility of negative interest rates being phased out before the end of the year, Governor Ueda’s remarks were construed as more general commentary rather than a definitive policy signal.

On the other hand, the Euro-dollar exchange rate has experienced a brief respite from its decline; however, the path to higher levels remains obstructed, persisting in the vicinity of the 1.06-dollar range. Following the European Central Bank (ECB) meeting on the preceding day, which implemented a 0.25% interest rate hike, elevating the central bank deposit rate to 4.00%, the Euro’s response has taken on a more pessimistic tone. This shift in sentiment came after the ECB downwardly revised its growth forecasts for the years 2023 to 2025, hinting at a potential shift in the ECB’s focus towards economic factors.

In the wake of the ECB’s policy meeting, market speculation regarding a rate cut in the coming year has gained momentum, with short-term financial markets indicating an implied 0.75% interest rate hike for the next year. There are even forecasts suggesting a 1.00% rate hike.

However, ECB President Lagarde has emphasized unequivocally that “no discussions regarding a rate cut took place during the policy meeting,” highlighting the disconnect between the market’s sentiment and that of the ECB. Market consensus is increasingly leaning towards the idea that the ECB’s rate hikes may paradoxically set the stage for future rate cuts, potentially forming an ironic narrative.

Meanwhile, the Pound-dollar exchange rate, in keeping with its trend of resilience against upward movements, has extended its losses, momentarily hovering around the 1.23-dollar mark, while remaining beneath the 200-day moving average. This week’s British employment statistics confirmed slackness in the labor market, with monthly GDP growth turning out to be more negative than anticipated. Amidst indications of a sluggish housing market in the UK, the Pound has encountered intensified selling pressure.

Next week brings forth the meeting of the Monetary Policy Committee (MPC) at the Bank of England. Market consensus assigns an 80% likelihood to an imminent interest rate hike, underscoring the expected outcome. Nevertheless, explicit signals that this forthcoming hike will signify the culmination of the rate-hike cycle remain scarce. Leading up to the MPC meeting, the release of the British Consumer Price Index (CPI) is scheduled, but market expectations do not anticipate reassuring outcomes in the context of the Bank of England’s deliberations.

Notwithstanding these dynamics, as the labor market loosens and the whispers of an economic slowdown grow louder, market awareness of the possibility of the rate-hike cycle approaching its conclusion steadily increases. In addition to next week, the market has also factored in a roughly 40% likelihood of one more rate hike in the near term.

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