The Federal Reserve’s reluctance to take action despite pledges to respect the inflation target, which has not been met in over five years, put the dollar under pressure. Then yesterday, it appears that Japanese officials may have intervened in the foreign exchange market, and as was the case earlier this year, the Federal Reserve reported checked on prices and indicated they were doing so at the request of the US Treasury. If true, it illustrates a notable difference between Japan, which tries to overwhelm the market with size (intervention and the BOJ’s balance sheet expansion), while the US tries finesse. Still, the MOF’s decision to intervene, and a preliminary review of the BOJ’s balance sheet suggests intervention involved selling almost $53 bln was not matched by the BOJ itself, which not only did not raise interest rates but shaved this year’s core inflation projection.
After the large moves in the foreign exchange market between the FOMC and MOF/BOJ, the currency market is mostly confined to narrow ranges (except the yen where officials have injected volatility), with most pairs not seeing any follow-through action. Oil prices are firm, but September WTI is poised to snap a three-week 30% surge. Chip and AI stocks are back in favor, with surges in the Japan, South Korea, and Taiwanese markets today. The Nasdaq looks poised to gap higher.
Prices
G10
• The euro held above the three-month downtrend that was violated after the FOMC meeting on Wednesday. It comes in near $1.1410 today. As US short-term interest rates continued to fall, the euro rose to almost $1.1540. It is consolidating, but in a little less than a 1/3 of cent range today below $1.1530. Some of the buying may have been related to the 3.6 bln euros in option at $1.1500 expire today and another 2.5 bln euros there that expire next Tuesday and Wednesday. The euro settled above the upper Bollinger Band yesterday, found near $1.1505 today.
• In late Tokyo yesterday, Prime Minister Takaichi confirmed speculation that the government will cut the sales tax on food and soft drinks to 1% starting in the new fiscal year near April. It also will help eligible families with cash subsidies. She denied the funding would come from new bonds and instead will seek non-tax revenue through a review of special accounts and government funds. The dollar was sold aggressively against the yen. It fell below JPY158 for the first time since May 14. The sharpness of the move spurred talk that the BOJ may have intervened and as was the case in January, the Federal Reserve reportedly checked on rates (usual event) but acknowledged it was on behalf of the US Treasury (unusual), though the timing was said to be late in the North American afternoon Early estimates based on changes in the BOJ’s balance sheet points to intervention of around JPY8.45 trillion (almost $53 bln). With the sharp drop, the greenback surpassed the (61.8%) retracement of the gains since the last intervention low (in May ~JPY155), found near JPY158.45. The dollar barely held above the 200-day moving average comes in today slightly below JPY158, which is also about the halfway mark of this year’s rally. The greenback has not traded below the 200-day moving average since last October. The dollar settled below the lower Bollinger Band, which is found near JPY160.25 today. The BOJ standpat decision helped the dollar recover to almost JPY160.90. Market nervousness over another possible intervention operation drove it back to around JPY158.55 in the European morning and is now hovering near JPY160. Japanese and US officials have in the past cited concerns about volatility, and what they did yesterday lifted one-month implied volatility to nearly 8.5%, a three-month high from around 6%, the lowest in around four years.
• Sterling reached the slightly above $1.3405 before the Bank of England’s 6-3 decision to stand pat. The central bank noted that inflation risks are tilted higher relative to the July Monetary Policy Report. Despite the optics, BOE Governor Bailey denied that the central bank was getting closer to a hike. In the broad dollar sell-off in the North America, sterling rose slightly through $1.3475. The upper Bollinger Band comes in near $1.3520 and the July high, which was a two-month high, nearly $1.3560. It is consolidating today in about a third of a cent range below $1.3470.
• The Canadian dollar edged higher yesterday, but as is often the case in a weak US dollar environment, it underperformed. The Canadian dollar’s 0.25% gain was the least among the G10 currencies. The US dollar slipped a little below CAD1.40 for the first time since mid-June but settled above it. Below the psychological support at CAD1.40, the CAD1.3980 area corresponds to the (38.2%) retracement of the US dollar’s rally from the May 1 low. A break could spur a move toward CAD1.39. The greenback has held above CAD!.40 so far today, but below CAD1.4025.
• After falling to a two-week low near $0.6920 on Wednesday, the Australian dollar recovered to almost $0.6990 in response to the FOMC decision. The gains were extended to nearly $0.7035 amid the broad greenback sell-off in the North American morning. It is one of the few currencies that extended yesterday’s rally today, albeit marginally. It rose to $0.7045, the highest since June 17. The upper Bollinger Band comes in slightly below $0.7040 today. The next technical target may be near $0.7055. It has found initial support near $0.7020.
EM
• The broad dollar decline pushed it to nearly MXN17.32 yesterday and a little further today (~MXN17.3165), a new low for the month. Nearby support is seen in the MXN17.28-30 area, and last month’s low was slightly below MXN17.16. The Mexican peso’s 0.90% gain in July, depending on today’s action, offsets the June decline. Latam currencies did well yesterday, led by the nearly 2.7% rise in the Colombian peso (9.8% gain on the month coming into today).
• The offshore yuan settled yesterday at its best level since January 2023, and the dollar closed slightly below CNH6.7450. The minor follow-through sales today took to aroundCNH6.7425. There is little on the charts now ahead of CNH6.70. The market’s caution may have been spurred by the firm fix. With the greenback’s broad weakness, it seemed like the PBOC would lower the dollar’s reference rate. Instead, it was set slightly higher: CNY6.7894 vs. CNY7.7892 (which was a new low since February 2023.
• The Indian rupee reached three-week highs today, helped by the broad setback in the US dollar, and softer oil prices. Last week’s reserve figures will be released shortly, and speculation was intervention was heavy. The dollar settled near INR95.3925. This week was the first in six that the greenback fell.
Other Markets
• Equities are finishing the month on an upbeat note, helped by the Nasdaq snapping of a six-day slide yesterday with its biggest gain since mid-June. Huge moves in the some of the largest Asia Pacific bourses today with renewed interest in chips. Japan’s Nikkei rose 4%, Taiwan’s Taiex jumped nearly 8%, while South Korea’s Kospi surged almost 18%. Europe’s Stoxx 600 is up about 0.65%, its fifth gain in six sessions. It is up about 1.5% this week and has only declined one week in the past eight. Nasdaq futures are up nearly 1.2%, while the S&P 500 and Dow futures are up a little more than 0.5%.
• Benchmark 10-year yields unwound early gains yesterday and finished lower. The European bond market recovery was led by the UK Gilts (~-5 bp) on what was seen as a dovish hold by the Bank of England. The UK two-year yield fell 11 bp, the most since late May. Today’s two-year yields in Europe are 3-4 bp higher, while the 10-year rates are around two basis points higher. The 10-year Treasury yield is up almost one basis point to push slightly above 4.25%. It is off around 6.5 bp this week.
• Gold rose higher for the second consecutive session and reached $4120, its best level in a week, and settled slightly above $4100. The break today of the $4070 area suggests the yellow metal is still in a choppy trading range. It is near $4050 in late in the European morning. Silver was somewhat less impressive, though it settled at its best level in six sessions. Yet there was no follow-through buying today and silver is slipped below $58 in the European turnover after peaking a little above $59 yesterday.
• New hostilities in the Middle East lifted the September WTI contract to almost $86 in early European activity yesterday. The momentum was not sustained in North America, where participants still (want to suspect) the war is winding down. The session low, a few pennies below $83, was seen before the US cash equity markets opened. It was sold to almost $81 earlier today before it rebounded to new session highs near $84.30. It settled about five dollars higher last week. It will snap a three-week 30% rally.
Data
• The US reports Q2 Employment Cost Index. It measures direct costs (compensation) and indirect costs (benefits, Social Security contributions, training, taxes). They have moderated in the last three years but remain above the where they were pre-pandemic. The ECI rose on average by 0.80% a quarter in 2025 and that is what it is expected to have risen in Q2 after a 0.90% increase in Q1. Between the University of Michigan’s preliminary and final July survey results, we suspect sentiment deteriorated. That seems to be what the Conference Board’s survey picked up.
• Canada reports May GDP. StatCan says that the preliminary data points to 0.1% growth, while the median in Bloomberg’s survey is for 0.2%. In any event, the Bank of Canada has already acknowledged that economic activity is broadening.
• The consumer price index in the eurozone rose by 0.2% in July for a 2.9% year-over-year pace, on a preliminary basis. It was at 2.8% in June and had fallen below 2% before the Middle East war. The core rate was edged up to 2.5% from 2.4%. It was at 2.2% in January, the lowest since October 2021.
• Australia reported another robust rise in private sector consumer credit in June. The 0.8% increase is above this year’s average (0.6%) and appears to have seen no slowing despite the three rate hikes that have been delivered this year. Separately, it reported 1.3% increase in Q2 PPI (0.4% in Q1) for a 3.6% year-over-year rate (from 3.0%).
• It is a busy day in Japan. As widely expected, the Bank of Japan left its policy rate at 1.0%. Its revised forecasts include a small increase in this year and next growth forecast (0.6% from 0.5% this year, 0.8% vs. 0.7% next). It shaved this year’s core inflation forecast to 2.5% from 2.8%. A slew of economic data was also released. The highlights include an uptick in the pace of Tokyo’s July CPI, though the headline and core remain below 2%. The headline rose to 2.0% from 1.7%, while the core (excluding fresh food) rate rose to 1.9%. The June unemployment rate was steady June at 2.5%. Retail sales slumped a dramatic 4.1% in June, which offset the gains of the past two months. It was the largest decline since the early days of the pandemic. June industrial output rose a strong 1.3% (0.1% in May). It was the largest increase since last September.
• China’s July PMI reflects an economy struggling to sustain forward momentum. The manufacturing PMI fell to 49.2 from 50.3. The non-manufacturing fell to 49.0 from 50.2. The composite stands at 49.3 (50.6 in June), the lowest since the end of 2022.
Reviewed by Marc Chandler
on
July 31, 2026
Rating:
