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The dollar exhibited strength
prompting a brief recovery of the USD/JPY to the 141 yen level.
“During today’s New York foreign exchange market session, the dollar exhibited strength, prompting a brief recovery of the USD/JPY to the 141 yen level”
However, as the afternoon progressed, selling pressure intensified, causing a rapid decline to the 138 yen level. This abrupt downturn was spurred by reports from the reputable Nikkei newspaper, indicating that the Bank of Japan is engaging in discussions about a potential revision to its Yield Curve Control (YCC) policy, which could result in yields exceeding the current 0.5% cap.
Reliable sources reveal that the Bank of Japan will delve into the YCC revision during its upcoming monetary policy decision meeting scheduled for the 28th. While it is expected that the upper limit on long-term interest rates will remain at 0.5%, the proposed revision may allow for some flexibility, enabling yields to surpass this threshold under certain market conditions.
Simultaneously, the overall forex market displayed a robust trend of dollar purchasing throughout the day. This was further fueled by the US GDP preliminary report for the second quarter, which surpassed expectations and bolstered the dollar’s attractiveness. Additionally, the European Central Bank’s policy meeting and President Lagarde’s press conference triggered heightened selling pressure on the euro, thus amplifying the demand for the dollar.
As a consequence, the EUR/USD dipped below the critical 1.10-dollar mark. Although the ECB implemented the anticipated 0.25% rate hike in line with market consensus, investors are closely scrutinizing the developments anticipated after September. The ECB has deliberately maintained an open stance, and President Lagarde underscored a data-dependent approach during the press conference. Recent data suggests the likelihood of an economic growth slowdown in the upcoming months, with signs pointing to a potential deceleration in inflation. Consequently, the ECB appears to have temporarily retreated from its previously hawkish stance.
In the short-term financial market, there is still an estimated 70% probability of a rate hike in September. Nevertheless, following today’s ECB policy meeting, there is a growing perception that the rate hike cycle may be approaching its conclusion.
Meanwhile, the GBP/USD faced increased selling pressure, plunging to the 1.27-dollar level. This decline led to a breach of the 21-day moving average, prompting cautious observations about its future movements. Should it continue to decline and break below the robust support level of 1.28 dollars, there is a possibility that the uptrend observed since March might come to an end.
With the Bank of England’s Monetary Policy Committee (MPC) meeting scheduled for the following week, the prospects of a significant rate hike from the Bank of England have dwindled further following the ECB’s policy meeting today. Although the market still anticipates a 0.25% rate hike during the MPC meeting on August 3rd, the probability of a substantial 0.50% rate hike has decreased to approximately 30%.
Both the Eurozone and the UK economy are confronting the risk of an economic slowdown. However, if the Bank of England signals a cautious outlook for the future, market expectations are likely to swiftly recalibrate, resulting in elevated risks of further depreciation of the pound.
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