FX Daily: Japan may wait for US data to intervene in FX
USD/JPY continues to test highs in a low-volatility, risk-on environment. Important US data will not be released immediately after the government reopens, but Japan may wait for a USD negative event to intervene. Meanwhile, UK growth was underwhelming, adding pressure to the GBP, which was already hit by political risks. Strong employment data supports our bullish AUD view
USD: Attention still on USD/JPY
The shutdown in the US has ended, but it did not provide much development for the Forex market. The White House said October payrolls and CPI data are unlikely to be released, meaning volatility will take time to ramp up. The G10’s 1-month average implied volatility is now trading with the widest positive spread (1.1 vol) over realized 1-month volatility since early April. This is largely due to very low realizations (the implied 1M is still below mid-October levels), but it is also a signal that the market is starting to price in some data-driven FX shake-ups in the coming weeks.
At the same time, open interest in bullish Treasury options has increased significantly in recent days, indicating that the general expectation is for weak US data to prompt a dovish Fed repricing. This is also our view, and with a 15bp rate cut forecast in December, we think the scope for a front-end impact on the dollar is significant.
Japanese officials may hope the forecast is correct, as USD/JPY continues to edge higher in a low-volatility, risk-on environment. The pair briefly breached 155.0 yesterday, as the Japanese Ministry of Finance continued to send warning signs. We are certainly entering FX intervention territory, but even if intervention is the plan, there is an argument for the Treasury to wait until US data releases resume.
Recall, in July last year, the Ministry of Finance surprisingly intervened after a sharp decline in US inflation, apparently changing the strategy: to intervene on market-induced USD/JPY sell-offs, not on rallies. If our intuition is correct, and the Treasury only intervenes verbally for now, the market may continue to test the upside tolerance limit at 156-157 in the next few weeks.
Elsewhere in the G10, Australia’s jobs data for October appeared strong overnight. The unemployment rate fell back to 4.3%, suggesting the 4.5% jump in September was just a blip. The economy added jobs at its fastest pace (42K) since April, driven entirely by hiring of full-time workers. AUD strengthens as the prospect of further RBA easing continues to be put on hold: we expect just one more cut in 2026. The Aussie dollar remains our favorite G10 currency going into the new year, and we target a move to 0.68 by mid-2026.
EUR: Consensus still seems bullish
In the FX Outlook webinar held yesterday (which can be re-watched here), we ran the following survey for our audience: where do you see EUR/USD ending up in 2026? 40% of 105 respondents chose 1.20-1.25, which is in line with our forecast (1.22), 36% chose a stable range of 1.15-1.20 and 18% expected a depreciation to 1.10-1.15.
Only 2% and 4% choose appreciation above 1.25 or depreciation below 1.10. These figures are broadly in line with the consensus, which sees EUR/USD at 1.21 by the end of 2026, and also confirm that the general expectation is to limit EUR/USD volatility next year (which is one of our main forecasts for 2026).
Returning to the current issue, EUR/USD has attempted a break above 1,160, and while we are bullish on the pair through the end of the year, we admit a move higher may be somewhat premature. The undervaluation has been trimmed to 0.5% in our short-term fair value model estimates, and the dollar is expensive to sell from a carry perspective. In our view, some weak US data is needed before 1.170 becomes a realistic short-term target for EUR/USD. For now, we expect more range-bound trading.
GBP: Weak growth data amid political noise
UK third-quarter growth came in slightly below expectations this morning: 0.1% QoQ and 1.3% YoY. This complicates Chancellor Rachel Reeves’ job ahead of the UK budget, where she will try to reassure markets with fiscally prudent measures, while trying not to unduly reduce growth or increase inflation.
All this comes amid renewed turmoil in British politics. Markets initially ignored reports of a leadership challenge to Prime Minister Keir Starmer, but as the noise increased yesterday, we saw EUR/GBP start to trade higher. The risk premium (short-term overvaluation) on the pair has now increased to 1.2%, in our view.
A major cabinet reshuffle or even a change of prime minister before the Budget seems unlikely, but with December’s BoE cuts still not fully factored in, we’re not too worried about EUR/GBP’s strength. After the Budget (this is our market preview), we could see the pair settle around 0.88, but downside risks for sterling are unlikely to run out in the short term.
RON: Inflation has stabilized, but it is too early to talk about lowering interest rates
Yesterday’s Romanian inflation figures and central bank meeting did not bring many surprises. The good news is that inflation has stabilized below 10% at 9.8% as expected and will likely remain stable for several months before we see the first decline in the middle of next year. The National Bank of Romania kept interest rates unchanged at 6.50% in line with expectations. Given the weak economy, we expect the NBR to cut interest rates again in the second quarter of 2026, supported by a stagnant economy.
On Friday, we’ll see GDP numbers and the NBR inflation report, which could tell us more about how close we are to this rate cut. EUR/RON has stabilized around 5,085, and it seems that the central bank has completely controlled the situation, and at the same time the pressure on a weaker RON has subsided. We expect the level change here to occur only in the second half of next year. Of course, it remains important to monitor continued consolidation efforts and policies. Another test for the government coalition will be the Bucharest mayoral election after Nicusor Dan becomes president.
Source: ING
