FX OVERVIEW
FX is being driven by US yield strength and broad risk aversion, with the 10-year Treasury yield near 5.3% and the dollar approaching its annual highs. Geopolitical escalation has lifted oil prices and inflation expectations, while eurozone and UK fiscal concerns are adding idiosyncratic pressure to EUR and GBP. The main exception is the yen, which remains weak as markets sharply reduce expectations for near-term BoJ tightening.
MAJOR PAIRS
EURUSD — French fiscal deterioration and surging OAT yields, with the 10-year yield above 4.96%, have become the dominant euro-negative catalyst. Combined with hawkish Fed expectations and US yields near 5.36%, the pair remains structurally bearish below 1.1265; a sustained break under 1.1195 would expose 1.1100–1.1060.
GBPUSD — Sterling remains under pressure despite an 81% market-implied probability of a November BoE hike, as the 30-year gilt yield reaches a 28-year high at 6.036% and raises concerns over UK fiscal sustainability. The pair is testing 1.3180 support; a recovery above 1.3285 is needed to challenge the bearish trend, while a failure at support would extend downside risk.
AUDUSD — Surging US yields, risk aversion and fading expectations for another RBA hike have pushed AUD/USD to 0.6950. The pair remains below its 20-period EMA at 0.7023 with RSI at 33.9; a break below 0.6904 would target 0.6865.
AUDJPY — The cross remains technically soft, but the fundamental balance is improving for the Australian dollar as BoJ tightening expectations collapse. With the probability of an October BoJ hike falling to 12% from 40%, the yen’s funding-currency status is weakening, creating a medium-term upside bias for AUDJPY despite current risk aversion.
NZDUSD — Renewed Houthi attacks on Saudi infrastructure have pushed Brent crude toward $102, reinforcing inflation and safe-haven dollar demand while exposing the Kiwi’s weak macro backdrop. 0.5580 is the key support; a break would target 0.5530, while only a recovery above 0.5630 would weaken the bearish setup.
USDCAD — The pair is consolidating around 1.4200 as elevated US yields support the dollar but higher oil prices provide meaningful CAD support. A break above 1.4300 would restore upside momentum, while a move below 1.4200 would open 1.4150; near-term bias is neutral-to-bearish while crude remains firm.
USDJPY — Widening US-Japan rate differentials continue to support the pair as the Fed remains hawkish and the BoJ signals a gradual, data-dependent path. USDJPY is holding above 157.54, with a break above 159.04 exposing fresh highs; the key risk to this view is renewed Japanese intervention.
USDCNY — The PBOC set the central rate modestly weaker at 6.7367 versus 6.7351, signaling greater tolerance for yuan depreciation amid weak domestic demand and persistent dollar strength. The move is not yet a breakout, but further fixing weakness would reinforce an upside bias in USDCNY and raise capital-outflow concerns.
USDSGD — The pair rebounded toward 1.2810 but lacks momentum and remains capped below 1.2835. Support at 1.2765 defines the range; a break below that level would negate the modest bullish bias and return the pair to a broader consolidation pattern.
CENTRAL BANK WATCH
- Federal Reserve: FOMC minutes showed strong support for another rate increase before year-end, with markets assigning an 86% probability to a December hike. Officials also flagged persistent inflation risks, including potential AI-related demand and productivity effects.
- Bank of Japan: Governor Ueda’s cautious tone and calls for gradual tightening have sharply reduced expectations for an October hike to 12% from 40%. This remains the principal driver of yen weakness.
- Reserve Bank of Australia: Markets now price only a 27% chance of another hike in November, weakening the Australian dollar against the US dollar despite the RBA’s still-elevated policy rate.
- Bank of England: November hike expectations remain high at 81%, but monetary-policy support is being overwhelmed by concerns over UK fiscal sustainability and the surge in long-end gilt yields.
- PBOC: The slightly weaker daily fixing indicates a cautious willingness to permit yuan depreciation while preserving broader exchange-rate stability.
MACRO DRIVERS
- US yield advantage: Treasury yields near 5.3% are widening rate differentials against Europe, Japan and the commodity currencies, sustaining broad dollar demand.
- Geopolitical risk and oil: Middle East escalation has pushed crude toward $102, raising inflation expectations, pressuring risk assets and reinforcing demand for the dollar.
- Eurozone fiscal contagion: France’s political gridlock, planned austerity and rising OAT yields are creating a euro-specific risk premium beyond the normal Fed-ECB divergence.
- Fiscal credibility: Elevated UK gilt yields and French bond yields show that sovereign risk is increasingly influencing G10 FX alongside central-bank policy.
POSITIONING IDEAS
Bullish
- USDJPY — Long bias on the Fed-BoJ policy divergence, with 157.54 as key support and 159.04 as the upside trigger.
- AUDJPY — Medium-term long bias as the BoJ’s reduced tightening probability weakens the yen’s funding-currency appeal.
- USDCNY — Gradual upside bias following the weaker PBOC fixing and signs of greater tolerance for yuan depreciation.
Bearish
- EURUSD — Short bias on French fiscal instability, elevated OAT yields and the widening US-EU yield gap; downside levels are 1.1100–1.1060.
- GBPUSD — Short bias while the pair remains below 1.3285, as UK fiscal concerns offset high BoE hike expectations.
- AUDUSD — Short bias below 0.7000, with 0.6904 and 0.6865 as the next downside thresholds.
- NZDUSD — Short bias below 0.5580 as oil-driven risk aversion and dollar strength pressure the Kiwi.
- USDCAD — Tactical short bias below 1.4200 if oil strength persists, targeting 1.4150.