Key points:
The U.S. dollar stayed firm on Wednesday, reaching its highest level in over two months. Market participants have adjusted their expectations for the Federal Reserve, now betting on a more gradual reduction in interest rates.
This shift comes as recent economic data has been stronger than anticipated, causing traders to reassess the likelihood of aggressive rate cuts.
The yen has come under considerable pressure, dropping to a three-month low of 151.72 against the dollar. This decline has been fuelled by rising U.S. Treasury yields, with the 10-year note reaching 4.222%, its highest point since July.
Expectations of a rate cut in November have also softened, with a 91% chance now priced in for a quarter-basis-point cut, compared to more divided views a month ago.
Picture: The USD/JPY chart shows a bullish trend with the price near a key resistance at 151.673 as seen on the VT Markets app.
Economic data remains relatively light, but market participants are keeping a close eye on the release of the Fed’s Beige Book, which will provide insight into U.S. economic conditions.
The last report highlighted slowing growth, though recent data suggests a more optimistic picture might emerge this time. If the report surprises to the upside, it could further support the dollar and push yields higher.
However, traders are cautious, with marginal gains in both the dollar index and U.S. yields signalling a more measured approach.
The dollar index, which tracks the greenback against six major currencies, edged up by 0.11%, reaching 104.18. So far, the index has gained over 3% this month, buoyed by the changing outlook on Fed policy.
Looking ahead to the U.S. presidential election, traders are also factoring in the potential for a Republican sweep, which is widely seen as bullish for the dollar.
A recent poll shows Vice President Kamala Harris with a slim 46% to 43% lead over Donald Trump, but markets are still largely pricing in a Trump victory.
Should the tide shift toward a Harris win, traders might begin to price in a pullback in both the dollar and Treasury yields, given her less inflationary stance on policy.
The yen’s weakness could be exacerbated by upcoming political events in Japan, where the general election on 27 October could disrupt the ruling coalition.
See also: Japan’s Nikkei Slips Due to Election Jitters
The prospect of a weaker government raises concerns over the Bank of Japan’s ability to reduce monetary stimulus, adding further pressure to the yen.
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