MUFG: Weekly FX View - FJElite
FX View: It has been an eventful week in the FX market, initially driven by the US- Iran deal and then quickly followed by a hawkish market reaction to the Fed's policy update. The USD initially weakened in response to lower energy prices but swiftly reversed those losses after the Fed signalled increased concern about higher inflation. While we do not expect the Fed to raise rates given inflation risks are likely to ease in the coming months, US yields and the USD can continue to move higher in the near term after forward guidance was watered down. This is creating a more challenging backdrop for Japanese policymakers, as USD/JPY moves further above 160.00. The BoJ’s latest rate hike and updated forward guidance have not been sufficient to prevent further JPY weakness. Pressure will build on Japan to intervene again if the pace of depreciation accelerates. In contrast to the BoJ and the Fed, the BoE is not in a rush to tighten policy. We no longer expect the BoE to hike rates this year, leaving scope for UK yields and the GBP to continue adjusting lower
- Trade Ideas: We are recommending a new long USD/NOK trade idea to reflect lower energy prices and higher US rates.
- JPY Portfolio Flows: After a relatively subdued month for cross-border flows by Japanese investors in April, there was a notable pick-up in May. Japanese investors bought JPY 3,086bn worth of foreign bonds, the largest since July 2025.
- AI Overview of BoE MPC Communication: Our sentiment analysis points to a clear shift by the BoE into a high uncertainty hold phase, moving away from signalling proactive tightening.
