Yen Rally Puts Global Capital Flows in Focus as BoJ Rate Bets Rise

The Japanese yen has extended its rally to a seven-month high against the US dollar, with USD/JPY briefly falling below 153 as expectations of a September Bank of Japan rate hike continue to build. Japan’s improved Q2 growth figures have added to those expectations, but the effects are reaching beyond the currency market. The unwinding of yen-funded carry trades and the possibility of Japanese capital returning home are putting global bond markets, liquidity and investor risk sentiment increasingly in focus.

Elsewhere, the US dollar remains subdued ahead of this week’s US inflation data, which investors will assess for its implications for September Fed rate expectations. Brent crude is holding close to $98 a barrel as renewed Middle East tensions keep energy supply and inflation concerns elevated.

UK retail sales growth has also slowed, while stronger Chinese exports have offered some support to the wider Asian economic picture despite softer-than-expected import growth.

Together, these developments are creating a more complex backdrop for Sterling, the euro and the US dollar as markets reassess interest rates, inflation and global capital flows.

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GBP: Sterling Steady Against Dollar, Lower Against Yen

GBP/USD: 1.3525 | GBP/JPY: 208.39

GBP/USD is trading around 1.3525, broadly steady on the day, while EUR/GBP has edged lower towards 0.8583, showing modest Sterling gains against the euro. The sharper move is in GBP/JPY, which has fallen towards 208.39 as the yen extends its rally and BoJ rate hike expectations increase.

August UK retail industry data showed total sales growth slowing to 0.7% year-on-year from 1.3% in July, while like-for-like sales growth eased to 0.5% from 1.0%. The weaker readings suggest consumer spending momentum cooled after firmer activity earlier in the summer, although the limited reaction in Sterling indicates that the data is not the main driver of the currency this morning.

Sterling is instead being shaped by contrasting external pressures. A subdued US dollar is helping GBP/USD hold above 1.3500, while expectations of a September BoJ rate hike appear to be supporting demand for the yen and weighing more heavily on GBP/JPY. For GBP/USD, market will now focus on this week’s US inflation figures for evidence that could strengthen or weaken expectations of a September Fed rate hike.

Key technical reference levels for GBP/USD: Resistance sits near 1.3549, while Support is around 1.3498, followed by 1.3471.

Key technical reference levels for GBP/JPY: Resistance sits near 209.55, followed by 210.40, while Support sits near 207.10, followed by 206.10.

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EUR: Euro Holds Near 1.1620 Ahead of ECB Rate Decision

EUR/USD: 1.1614 | EUR/GBP: 0.8585

EUR/USD is holding broadly steady around 1.1614, while EUR/GBP is consolidating near 0.8585. The euro is receiving some support from expectations of a European Central Bank (ECB) rate hike on Thursday, while softer US dollar conditions are also helping EUR/USD stay above the 1.1600 level.

Germany’s July trade surplus widened to €21.3 billion from €15.4 billion in June, according to the Federal Statistical Office. However, the larger surplus was driven mainly by a 5.7% monthly fall in imports, while exports also declined by 0.8%. The figures therefore show an improved trade balance, but not a broad improvement in German external demand.

Attention is now turning to Thursday’s ECB policy decision, with markets expecting a 25-basis-point rate hike. Eurozone annual inflation rose to 3.3% in August from 2.9% in July, according to Eurostat, largely reflecting higher energy inflation. This keeps inflation pressures in focus for ECB policymakers, although Eurostat’s Harmonised Index of Consumer Prices (HICP) excluding energy was estimated at 2.2%.

For EUR/USD, the next direction could depend on how the ECB communicates its interest-rate outlook and how this week’s US inflation figures affect September Fed rate hike expectations. A more hawkish ECB message could provide support to the euro, while firmer US inflation could increase support for the US dollar. However, the market reactions can differ and depend on expectations already reflected in prices.

Key technical reference levels for EUR/USD: Resistance sits near 1.1635, followed by 1.1710, while Support sits around 1.1608, followed by 1.1565.

Key technical reference levels for EUR/GBP: Resistance sits near 0.8607, followed by 0.8632, while Support sits around 0.8585, followed by 0.8565.

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USD: Dollar Slips Below 99 as Yen Rally Adds Pressure

DXY: 98.84 | USD/JPY: 153.27

The Dollar Index (DXY) has fallen below 99.00 to around 98.84, reaching a two-week low, while USD/JPY has dropped sharply towards 153.48 as the yen extends its rally to a seven-month high. The move shows that the US dollar is facing pressure not only from caution ahead of this week’s inflation data, but also from a significant shift in Japan’s interest-rate outlook.

Rising expectations of a September BoJ rate hike are increasing demand for the yen and encouraging investors to reduce yen-funded carry trades. These trades typically involve borrowing in yen at relatively low interest rates and investing the funds in higher-yielding overseas assets. As Japanese interest rates rise and the yen appreciates, those positions become less attractive and more expensive to maintain, which can prompt investors to buy back yen and reduce exposure to overseas assets.

The scale of these positions means the impact could extend beyond USD/JPY. Cross-border yen borrowing reached around ¥360 trillion earlier this year, highlighting how widely the Japanese currency has been used as a source of low-cost funding. A broader unwinding of these trades could affect global capital flows, demand for overseas bonds and wider investor risk sentiment, particularly if higher Japanese interest rates make domestic assets more attractive to Japanese investors.

For the US dollar, attention is now turning to August Producer Price Index (PPI) data on Thursday and Consumer Price Index (CPI) data on Friday. Investors will assess both reports for evidence of whether inflation pressures are increasing enough to support a September Fed rate hike. Markets are currently pricing around a 60% probability of a 25-basis-point Fed rate hike at the Federal Reserve’s 15–16 September meeting.

The takeaway for the US dollar is therefore being shaped by two separate policy developments. Higher-than-expected US inflation could increase September Fed rate hike expectations and provide some support to DXY, while continued expectations of BoJ tightening could keep downward pressure on USD/JPY through further yen demand and carry-trade adjustments.

Key technical reference levels for DXY: Resistance sits near 99.23, followed by 99.52, while Support sits around 98.55, followed by 97.67.

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Yuan and Regional FX Hold Steady as China Trade Picture Stays Mixed

USD/CNH: 6.7000 | AUD/USD: 0.7208 | NZD/USD: 0.5864

The Chinese yuan is holding close to its highest levels against the US dollar since early 2023, with USD/CNH trading around the 6.7000 area as investors assess China’s latest trade figures. China’s August trade surplus widened to $119.09 billion from $112.5 billion in July, broadly matching expectations and showing that external trade remains an important source of support for the Chinese economy.

Exports increased 25.0% year-on-year in August, matching forecasts and accelerating from 23.9% in July. Imports also improved to 28.2% from 27.5%, although growth fell short of the 30.0% forecast. In yuan terms, China recorded a trade surplus of CNY809.3 billion, above the CNY795 billion expected. The figures point to resilient overseas demand, particularly for Chinese technology and manufactured goods, while the weaker-than-expected import reading suggests domestic demand remains less convincing.

AUD/USD is trading around 0.7208, with China’s trade figures generating only a limited immediate reaction in the Australian dollar. Australia’s close trade relationship with China means Chinese economic data can influence the currency, but today’s AUD/USD move is also being shaped by domestic factors. Australian consumer confidence fell 5.2% in September, while expectations of another Reserve Bank of Australia (RBA) rate hike and broader US dollar weakness are helping limit pressure on the pair.

NZD/USD has fallen towards 0.5850 for a third consecutive session. China is one of New Zealand’s largest trading partners, so the below-forecast Chinese import figure adds another consideration for the New Zealand economic outlook. However, China’s trade data is not the only driver, with New Zealand interest-rate expectations and wider US dollar movements also influencing the pair.

The takeaway across these currencies is therefore mixed. The yuan continues to trade near multi-year highs as China’s export sector remains resilient, while the Australian dollar has shown little direct reaction to the trade release. The New Zealand dollar remains under greater pressure, with softer Chinese import growth adding to existing domestic rate concerns.

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Current Rate Table

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Market Lookahead

Wed, Sep 09

• China Consumer Price Index (CPI) & Producer Price Index (PPI) (Aug)
• US ADP Weekly Employment Change

Thurs, Sep 10

• ECB Interest Rate Decision & Press Conference
• US Producer Price Index (PPI) & Core PPI (Aug)
• US Initial Jobless Claims

Fri, Sep 11

• UK GDP, Industrial & Manufacturing Production (Jul)
• UK Goods Trade Balance (Jul)
• US Consumer Price Index (CPI) & Core CPI (Aug)

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