FOREX: JPY Slide Holds, But Gains Could be Limited Above Y150
- JPY slid sharply against all others Monday in the extended response to the surprise victory for Takaichi in the LDP leadership race. Trump congratulated the new Japanese PM, setting the leaders up for their first face-to-face summit on October 28th. Ahead of Takaichi's first formal actions in government, one of her primary policy advisers Honda stated that Takaichi wants the Bank of Japan to proceed "cautiously" on interest rates, and that an October rate hike is "difficult". While the comments appeared to pressure the Bank away from tightening policy, the view that a December hike is not a problem and that the currency is approaching levels deemed too weak helped boost the JPY off lows.
- The EUR traded weaker in early Europe, following the resignation of the French PM Lecornu - and bedding markets in for an extended period of political risk and
budget brinkmanship. French equities also see weakness - with the CAC40 easily the underperformer in Europe. Next major support in EURUSD crosses at
1.1646, the late Sept low. Weakness through here snaps the weak uptrend posted off the August 1st low. - The USD's NY morning fade aided EURUSD and GBPUSD well off earlier lows, helping EURUSD almost entirely erase the PM resignation losses. EURGBP still
traded heavy, however, meaning GBPUSD's rally has the price within range of the Friday high at 1.3486. It's fiscal and political risk that's likely a more primary GBP
driver for the rest of this year - The front-end of the GBP vol curve provide a further signal for market concern over the Autumn Budget. The flatter
front-end of the curve and the building premium for 2m implied vols shows markets building a risk premium into the event. - We see GBP's driver as the fiscal policy mix ahead. The Gilt curve and, in particular, the longer-end has regained a sense of stability after being marked sharply higher at the beginning of September. How valid and long-lasting this proves to be should determine GBP/USD's ability to trade within range of 1.3525 (50% mid-Sept downleg) and make meaningful headway toward the bull trigger of the July 1st high at 1.3789.
- Australia's Westpac Consumer Confidence data is the Tuesday highlight, followed by German factory orders for August. US trade balance data was set for release Tuesday, however the extended government shutdown will keep that figure quiet for now. There remains very little pressure on either side to make concessions and rush toward a conclusion for the shutdown at this point - leaving markets with a core expectation for a further week or so of no Federal government activity.
- Various Fed speakers are due Tuesday, including Bostic, Bowman, Miran and Kashkari - who will be carefully watched for any suggestions that a prolonged government shutdown will hinder the US economy further, and require a more forceful response from the FOMC.
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LOOK AHEAD: US Macro: PPI (Wed) and CPI (Thu) Inflation
US PPI inflation is released on Wednesday before CPI inflation on Thursday, an unusual ordering that should see core PCE implications dialled in after the CPI release rather than the usual wide range waiting for specific PPI details. PPI will be watched more closely than usual this month after a far stronger than expected jump in last month’s July report fired a warning short over tariff-based cost pressures starting to feed through. That included a 0.6% M/M increase in our preferred core series of PPI ex food, energy & trade services, which strips out items such as the then booming portfolio management & investment advice category following the strength in equity markets. It's too early to gauge an accurate sense of analyst expectations for August.
CPI inflation on Thursday will then be the last major release ahead of the Sep 17 FOMC decision. Consensus looks for core CPI at 0.3% M/M after the 0.32% M/M in July, another monthly increase comfortably above a pace consistent with 2% inflation. August should in theory start to see the largest tariff impacts along with September and possibly October. Returning to July’s report, core goods inflation was softer than expected, at a still solid (by core goods standards) 0.2% M/M for a second month running but about half that of 0.4% expected by analysts. Instead, non-housing core services surprised higher. The latter was a “dangerous” development in the words of a usually dovish Chicago Fed’s Goolsbee (’25 voter), who speaking after Friday’s payrolls report is still undecided on a September cut whilst looking for August inflation data “to get more information”.
LOOK AHEAD: US Macro: Payrolls Preliminary Benchmark Revisions (Tue)
- The BLS on Tuesday will publish preliminary estimates of benchmark revisions, based off QCEW data for Q1.
- These will give an indication of the actual benchmark revisions on the Mar 2025 level of payrolls due with the Jan 2026 payrolls report released in early February.
- Bear in mind that the final benchmark estimate tends to nearly always be more negative than the preliminary figure – see historical values to the right.
- That doesn’t mean they can’t be large again after last year’s historically negative revision that lowered the level of payrolls by ~600k. Initial estimates we’ve seen look for another large downward revision, with the smallest being worth -550k but with wide ranges higher.
FED: Barclays Adds A Cut To 2025 Fed View
Barclays analysts now expect three Fed cuts in the remainder of the year, adding October to their pre-existing call for 25bp reductions in September and December. "Given the disappointing August employment report, we expect the FOMC to see more elevated downside risks to the employment side of the mandate."
- As for a 50bp September cut, "we think that the FOMC will view [that] as sending too strong a signal that labor market conditions are deteriorating. Indeed, we think that participants such as Powell understand that the slower pace of payroll employment reflects at least, in part, slower labor supply, which does not translate into increased labor market slack."
- For 2026 they continue to expect 25bp cuts in March and June to 3.00-3.25%, but "we do not think the FOMC will be able to cut rates more than twice next year, as we think that activity will show some slight acceleration, with the economy adapting to the new tariff environment and fiscal policy providing some support, and the unemployment rate will revert down amid limited increase in labor supply."
