Yen awaits intervention. The dollar continues to lead.
Dollar maintains advantage, market braces for possible Japanese intervention, and pound gets political support
Global currency markets began the week with a moderate increase in demand for safe-haven assets, allowing the US dollar to continue strengthening. The American currency is supported by rising Treasury yields, which increasingly contrast with the dynamics of European debt markets.
Investors continue to price in a scenario of economic divergence between the US and Europe. The American economy shows greater resilience, inflationary pressures remain relatively elevated, and the Federal Reserve is in no hurry to abandon its hawkish rhetoric. This combination of factors forms the foundation for the dollar's continued strength in the short term.
Market increasingly expects Japanese currency intervention
One of the main topics of the week remains the situation surrounding the Japanese yen. The weakening of the Japanese currency has long been a concern in Tokyo, and recent market signals indicate that market participants are beginning to price in an increased likelihood of new currency intervention.
Additional attention was drawn by data from Japan's Ministry of Finance, which showed a reduction in its portfolio of US government bonds by approximately $75 billion in May. The volume of sales almost corresponds to the scale of currency interventions conducted by Japan in April and May, when about $73 billion was spent to support the yen.
On the one hand, such large-scale sales of US bonds could cause some discontent at the US Treasury, which closely monitors the behavior of large foreign holders of government debt. On the other hand, the options market shows an increase in short-term USD/JPY volatility, indicating investors' preparation for potential actions by the Japanese authorities.
Particular attention is drawn to the upcoming meeting between US Treasury Secretary Scott Bessent and his Japanese counterpart Satsuki Katayama. The Japanese side previously stated that the countries are ready for "decisive steps" in the currency market if necessary.
Traditionally, the Bank of Japan prefers to conduct interventions during periods of low liquidity, when the effect of intervention can be stronger. The next such window opens around the US Independence Day holiday on July 4. However, the market does not rule out that intervention could occur even earlier if the USD/JPY pair continues to move to new highs.
Strong dollar continues to pressure euro
The European currency remains under pressure not only due to the strength of the dollar but also due to a change in the rhetoric of the European Central Bank.
ECB President Christine Lagarde stated earlier that there is currently no need to strengthen the monetary response to geopolitical risks and military conflicts, as inflation, in her opinion, is gradually returning to the target level.
Such comments were perceived by the market as moderately "dovish". Although expectations for an ECB rate hike in the third quarter persist, investors have reduced the likelihood of an earlier move in July.
For the euro, this creates additional difficulties. While the Fed maintains a hawkish stance, the ECB is trying to curb overly aggressive expectations for future policy tightening. Such a contrast continues to work in favor of the dollar.
An additional risk factor for the European currency remains the weak prospects for economic growth. Even if PMI business activity indices show some improvement due to lower oil prices, the overall picture of the eurozone economy remains quite fragile.
Pound receives support from political changes
Unlike the euro, the British pound has shown resilience in recent days. Political developments following the resignation of Prime Minister Keir Starmer are the main driver.
The market is increasingly confident that the next government will be led by Andy Burnham. At the same time, significant attention is focused on who will take the position of Chancellor of the Exchequer.
Investors reacted positively to the news that former health minister Wes Streeting supported Burnham's candidacy and abandoned his own leadership ambitions. This increased the likelihood of his appointment as Chancellor.
For financial markets, Streeting is considered one of the most business-friendly representatives of the Labour Party. That is why his possible appointment is seen as a factor of stability for British government bonds and the pound sterling.
At the same time, excessive optimism may prove premature. British markets have a history of sharply reacting even to minor doubts about the government's fiscal discipline. Therefore, after the initial positive impulse, risks for the pound may gradually shift towards a correction.
In addition, the fundamental picture for the British currency remains ambiguous. The Bank of England is unlikely to rush to further tighten monetary policy, which may limit the pound's growth potential during the summer months.
The main market theme is the divergence between the US and the rest of the world
At the center of investors' attention remains one key macroeconomic narrative - the exceptional resilience of the American economy against the backdrop of a slowdown in other major regions of the world.
It is this divergence that explains the simultaneous rise of the dollar, the increase in US bond yields, and the relative weakness of most competing currencies. Until the market receives convincing signals about a change in Fed policy or a significant deterioration in US economic indicators, the dollar is likely to maintain its advantage.
In the short term, the greatest attention should be paid to three factors: a possible Japanese currency intervention, further comments from Fed officials, and political changes in the UK. These are the factors that could determine the dynamics of major currency pairs in the coming weeks.