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In the overnight foreign exchange markets, the notable movement has been a decline in USD/JPY approaching 150, sparked by traders anticipating another interest rate increase from the Bank of Japan. It’s likely that USD/JPY will remain pressured today as we await tomorrow’s January CPI data from Japan. Additionally, we foresee a potential emergence of a fiscal risk premium within the EUR/USD as national bond markets brace for increased defense expenditures.
As for the dollar, the DXY Dollar Index has softened slightly, though this downturn is mainly attributed to the situation in Japan. Domestic investors appear optimistic about the limited official resistance to rising JGB yields and the possibility of another hike by the Bank of Japan this summer. Even with a 2bp drop in short-term US yields following the release of January FOMC minutes, the message from the Fed indicates a need for further proof before rate cuts occur. FX markets are also responding to President Trump’s remarks about a potential new trade agreement with China.
Concerning the euro, geopolitical shifts are compelling Europe to significantly boost defense spending, leading to uncertainty about budgetary impacts. European markets are beginning to reflect these trends, evidenced by the bearish steepening in bond curves. The eurozone’s data on consumer confidence today is not expected to stir much excitement, with markets on edge about fiscal sustainability amidst high savings rates and subdued demand.
