Key Highlights

• Oil prices rise to six-week highs on worsening Middle East conflict   
• Trump says Bombardier cannot sell in US unless it builds there
• Copper surges to all-time high as tariff turmoil rocks markets
• JPY surges to near seven-month highs amid hawkish BoJ rate hike bets

Forex

USD sold off in thinner liquidity due to the US Labour Day holiday. Interestingly, the stellar NFP report, (and also Monday’s push higher in oil prices), didn’t see a huge jump in the greenback. That shows that markets are squarely focused on Friday’s inflation data, as the key determinant for next week’s FOMC rate decision. There’s currently around a 60% chance of Fed hike. That’s up from around a 50:50 bet before the job figures. Monday’s downside dollar move was chiefly brought on by another big move in USD/JPY. See more in that section.

EUR was relatively quiet with prices holding under the 200-day SMA at 1.1631. The next upside target is just above 1.17 while the recent narrow range has 1.1560.70 as initial support. The German regional election result has grabbed the headlines, but key is the government’s infrastructure and defence spending plans which shouldn’t be altered and are supporting German growth. The main risk event this week is Thursday’s ECB rate hike, and what forward guidance if any President Lagarde gives.

GBP was relatively quiet and remains in a short-term range between 1.35 and1.3550. UK Chancellor Healey prepped markets for the late October Budget with his major speech urging state-owned bodies to invest more in the private sector. He stressed that the government needs to be ‘honest’ about the need to control public spending while insisting that fiscal credibility was ‘indivisible’ form the drive for growth.

JPY hit a six-month high as the major dropped sharply again, building on the 3% gains from Wednesday and Thursday last week. Increased bets on the BoJ hiking rates are helping, with next week’s rate rise at their meeting nailed on, with another 22bps priced in by markets by year-end. A portfolio shift towards more domestic assets by the $2 trillion GPIF pension fund is probably an even bigger reason for the moves.  

Stocks

US stocks: US stock markets were closed by the Labour Day holiday. Highlights this week include the quarterly results for hyperscaler Oracle after the close on Thursday that could bring renewed focus on the AI trade, along with software company Adobe, plus Gamestop releases its latest earnings on Tuesday.

Asian Stocks: Futures are mostly green. APAC stocks were mixed after Friday’s strong US job report was offset by rising ongoing Middle East geopolitical tensions. The ASX 200 was unchanged with energy and mining strength competing with softness in tech and telecoms. The Nikkei 225 gapped above 66,000 with tech rising. The Hang Seng and Shanghai Comp underperformed with Baidu and Xiaomi under pressure as well as big banks.

Gold

Gold struggled as Fed rate hike bets remained elevated above 50%. Much depends on the inflation reports this week, with PPI front running the CPI data on Friday.

Chart of the Day – EUR/JPY falls to support

Big moves in the yen have continued again this week, ahead of US CPI and the ECB meeting. We wrote last week that the GPIF portfolio shift would potentially be a vote of confidence in Japan’s interest rate outlook, further strengthening the appeal of yen-denominated assets. Other tailwinds boosting the yen include the unwinding of carry trades, capital repatriation and US political pressure overshadowing a lot of this.

We’ve highlighted previously the major long-term resistance above 188 from 1990 in this popular pair. Prices have struggled on several occasions near that barrier. Since Tuesday last week, the cross has fallen from 185.74 down below the spike low after the July/August intervention at 179.35. That is also near a minor retracement Fib level around 180. If this breakdown is confirmed, the next major support is much lower just above 175. Prices are oversold but there is a high bar for any hawkish ECB surprise on Thursday, with lofty bets on more ECB rate hikes (75bps in July 2027) priced in already.