• President Trump approaches major crossroads in Iran war
• China presses Iran to help rein in Houthis after Saudi appeal
• BoE floats a November rate hike if energy prices don’t come down
• BoJ set to raise policy rate at meeting to counter inflation risks

FX Analysis

USD steadied after the big move higher during and after Wednesday’s hawkish Fed hike. Chair Warsh has seemingly improved his inflation-fighting street cred, as we said previously. His key phrase was that the Fed simply reduced ‘a dose of accommodation’, implying there are more doses to come. Markets price in more hikes than the median dot plot, with around three more moves by July and a 50:50 bet on the next rise at the October meeting and 31bps by year end. Data and likely oil prices determine if that coin toss turns while Warsh’s market-pleasing performance raises the bar for fans of the debasement trade. If prices close solidly on the week and keep above the 50-day SMA at 99.91, then bulls will target 101 and beyond.

EUR traded modestly higher as prices consolidated after the post-Fed break lower. Two-year rate differentials widened to levels last seen in July, though narrowed marginally on Thursday. Energy and gas prices will probably determine a lot of this downside move and it if extends. There’s not much support until just above 1.14.

GBP underperformed its peers again after a hawkish hold by the BoE. The MPC left rates on hold at 3.75% with a 6-3 vote as predicted, but Governor Bailey warned action may be needed in November depending on energy prices. Inflation may move above 4% into the new year with the household energy cap jumping 25% in January if natural gas prices stay at current prices. That kind of elevated inflation has typically seen second round effects, key will be how persistent these price pressures are. Food inflation is an important metric for the MPC and is currently easing, so too wage growth. Markets price in 22bps at the next meeting in November with around 95bps by July, down from 24bps and 101bps respectively before the rate decision.

JPY strengthened as the Treasury yield rally slowed. All eyes are now on the BoJ meeting, with a rate hike fully priced in, another by December and around 90bps until July 2027. See more below for a preview.

Stock Market Analysis

US stocks: The S&P 500 added 1.14% to close at 7,637. The Nasdaq closed up 1.73% at 29,446. The Dow Jones settled higher by 0.61% at 5`1,783. All sectors were positive apart from two, with Tech, Consumer Discretionary and Health Care leading the gains. Communication Services and Financials were in the red. The VIX index, Wall Street’s fear gauge, slid to 15.4, its lowest close for nearly two weeks. Intel climbed another 7.7% as investors further digested reports it is discussing US memory chip production with SK Hynix. The SOX semiconductor index jumped 3.1% as Nivida added 2.5%, Micron gained 5.5% and Sandisk rose 6.2% among the big chip and memory makers. SpaceX advanced 2.6% after Wednesday’s 5% jump, as it announced the launch of the fully reusable rocket, Starship 14 on September 22. The Intel and SK Hynix talks are also positive for SpaceX.   

Asian Stocks: Futures are mostly positive. APAC stocks were mixed as markets digested the hawkish Fed dot plot and Warsh’s press conference. The ASX 200 was supported by healthcare and financials but offset by commodity weakness. The Nikkei 225 gave back gains as traders focused on the upcoming BoJ meeting. The Hang Seng and Shanghai Comp were pressured as the HKMA lifted rates for the first time in more than three years.

Gold & Silver Analysis

Gold enjoyed its best day since mid-August as bugs found support and rebounded off the 50-day SMA at $4,278. Oil prices fell for a second day while Treasury yields pulled back after the potential Fed spike high. Silver jumped 3.6% also rebounding off its 50-day SMA at $62.70.

Day Ahead – Bank of Japan Meeting

Markets have moved quickly to price in a BoJ hike over the past few weeks, reflecting a meaningful shift in the government and BoJ approach to official currency management. Officials in Tokyo moved from intervention to a more fundamentally driven approach, also prompted by the US Treasury and Secretary Scott Bessent.

With a rate hike fully baked in today, it’s down to policymakers to match the current lofty rate hike pricing by money markets. Expectations are for a clear plan for more policy tightening though the risk is that Governor Ueda falls short of these hawkish bets. Governor Ueda has history of being cautious when global uncertainties rise, and with rising energy prices comes higher global yields and the risk of a global stock market downturn. 

Chart of the Day –USD/JPY bouncing

The outlook for relative central bank policy remains relatively yen-supportive as markets move to price in a more aggressive tightening path for the BoJ. For USDJPY, major support around the intervention lows at 154, and then at the major long-term retracement level (50%) at 151.93. The latest break of 155 means more disappointment from Ueda see buyers target 158 and the 200-day SMA at 158.37.