The Calm Before the Break Yen, Sterling, and the Dormant Dollar

Volatility might be thin, but the undercurrents in FX remain turbulent especially where central bank narratives and geopolitical risks intersect. We're not just trading data points anymore. We’re navigating political fragility, central bank hesitation, and slow-burning trade tensions that could reignite just as quickly as they recede.

USD/JPY Patience Wearing Thin, but Ueda Sticks to the Script

The yen sold off on initial dovish remarks from BoJ Governor Ueda, who reminded markets that inflation isn’t quite entrenched enough to justify further tightening. But then came the classic BoJ twist if the price trend firms up, rates will move. That conditional hawkishness is the BoJ’s signature move lately: sounding cautious, moving slower than peers, and banking on uncertainty to justify delays.

Still, the policy meeting next week is unlikely to deliver fireworks. Instead, the focus is on the pace of balance sheet tapering. Reports suggest a slowdown in JGB purchase reductions from ¥400bn per quarter to potentially ¥200 400bn starting next fiscal year. If true, that softening in tapering rhythm is already feeding into lower long-end yields and gentle yen weakness.

Overlay that with looming trade negotiations Japan and the U.S. are in a pre-deadline fog ahead of the 9 July tariff talks. Tokyo’s Economic Minister has confirmed discussions are still live, but no breakthroughs yet. The market’s betting the BoJ would rather watch those outcomes unfold than front-run them with aggressive rate moves.

And that’s wise. Why act before knowing if “reciprocal tariffs” are about to add a fresh layer of pressure to Japan’s already delicate trade backdrop?

USDJPY H1 Chart 

GBP UK Labour Market: Cold Showers in the Summer Heat

Sterling took a hit after UK jobs data delivered a synchronised downturn: payrolls dropped by 109,000 in May the largest fall since the 2020 lockdowns. The total payroll shrinkage since last year’s budget now stands at 276,000. That’s not just a blip; it’s a trend.

Private sector wage growth (ex-bonuses) cooled to 5.1% y/y from 5.5%, further supporting the BoE’s measured easing path. Markets have now fully priced a 25bp cut by the August MPC meeting, a move reinforced by the recent ONS admission that inflation data in April was overstated. That inflation revision added fuel to an already dovish repricing.

But it’s not game over for GBP bulls. Despite this softness, sterling has held up well against a backdrop of strong equity markets and revived carry demand. The pound still yields meaningfully in G10 terms, and with risk appetite holding firm, GBP remains a favoured vehicle in the hunt for yield.

What could break that? A BoE signal that easing will accelerate. Short of that, the pound’s broader uptrend may only bend, not break.

USD/CNY – Trade Talks Stretch, But Yuan Sleeps On

Washington and Beijing continue their latest round of trade talks in London, extending into a second day. Optimism is being stoked by reports that the U.S. may ease export restrictions on certain tech products in exchange for Chinese concessions on rare earth shipments. But there are caveats: cutting-edge chips like Nvidia’s H20 are still off the table.

That’s hardly a breakthrough more of a tactical repositioning. China’s latest trade data showed a brutal -20% y/y drop in exports to the U.S. for May, underscoring how real the pain is. Yet the yuan has been steady USD/CNY hovering just under the 7.20 level.

For now, Beijing appears willing to tolerate a soft currency as a cushion against trade shocks, but any progress in negotiations could quickly shift that balance.

AUD and NZD Dollar Drift, Risk Holds

The Aussie and Kiwi continue to benefit from the post-April global risk rebound. The VIX remains below 20, and U.S. one-year inflation expectations have eased slightly both factors keeping the door open for carry trades.

That said, AUD/USD once again failed to crack resistance at 0.6530/40, slipping below short-term support at 0.6500. Technically, this could trigger a reset lower, but if we stay above 0.6400 and certainly above 0.6340 the medium-term bull case still holds. Rising FX hedging by Aussie funds and continued offshore demand for domestic fixed income offer support.

In short: there’s structural tailwind, but we’re flying against mild headwinds in the short term.

CAD Dollar Drift Leaves Loonie in Limbo

Canada saw little directional action overnight, with USD/CAD staying stuck in a range. Systematic accounts bought the pair yesterday, but conviction remains low. With the broader dollar unable to sustain a move in either direction for more than a couple of sessions, we’re in chop territory. That said, tactical long USD/CAD trades are being used to hedge broader USD shorts a smart move given the asymmetry of risks around oil and soft U.S. data surprises.

There’s a fog hanging over markets not from uncertainty, but from narrative fatigue. Everyone is waiting: for central banks to act, for trade deals to crystallise, for economic signals to shift the pendulum definitively.

Until then, currencies are drifting. But make no mistake: once the fog lifts whether it’s a BoJ pivot, a UK inflation shock, or a surprise breakthrough in trade the moves will come fast. Positioning now requires not just patience, but flexibility.

We’re at a hinge moment, and these quiet weeks may end up being the calm before the next macro storm.

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