USD/JPY was volatile in Europe, fuelling talk of possible currency intervention. The pair traded near 162.50 in early Asia, then dropped more than 100 pips within minutes, briefly nearing 161.00 before rebounding towards 162.00 and fading again; it was last down about 0.8% below 161.50. Later, the US Bureau of Labor Statistics is due to publish June’s employment report, including Nonfarm Payrolls, the unemployment rate and wage inflation. Separately, a private-sector member of Japan’s Council on Economic and Fiscal Policy said the Bank of Japan should keep raising rates at a moderate pace.
The US dollar was softer after Wednesday’s data showed the ISM Manufacturing PMI easing to 53.3 in June from 54, while the Prices Paid Index fell to 73 from 82.1; early Thursday the USD Index drifted towards 101.00, down about 0.4%. Federal Reserve Chair Kevin Warsh spoke at the ECB Forum, with an FXS Speechtracker score of 5.6/10 and reiterated the 2% inflation objective. Gold rose above $4,100 on Wednesday before settling slightly higher; XAU/USD held above $4,050. Sterling climbed, with GBP/USD up more than 0.5% towards 1.3350 after BoE Governor Bailey’s 6/10 Speechtracker reading versus a 4.7/10 historical average. EUR/USD traded above 1.1400 after euro area HICP inflation slowed to 2.8% in June from 3.2%, below a 3% consensus.
Volatility in USD/JPY and U.S. Data Impact
The sudden drop in USD/JPY below 161.50 strongly signals currency intervention, making it a dangerous pair to trade directionally. We saw similar sharp moves back in the spring of 2024 when Japanese authorities spent over $60 billion to defend the yen. This history suggests we should anticipate heightened volatility and consider using options to trade the range rather than betting on a clear direction.
All eyes must now be on today’s Nonfarm Payrolls report, as it will dictate the US Dollar’s next move. The recent drop in the ISM Prices Paid index to 73 suggests inflationary pressures are easing, which could lead to a weaker-than-expected jobs number. A miss on payrolls, like the unexpected jump to 272,000 we saw in a report from May 2024, can cause significant repricing, and a weak number now would likely push the USD Index further below 101.00.
Central Bank Divergence and Gold Resilience
Despite some cooling data, the Federal Reserve remains publicly committed to its 2% inflation target, with Chair Warsh rejecting any forward guidance. This creates a conflict between recent data and stated policy that makes USD trades uncertain. This divergence is why we see opportunities in pairs like GBP/USD, which is benefiting from the Bank of England’s own firm stance against rate cuts.
We believe the clearest trade is based on central bank policy divergence, particularly between the UK and Europe. The Bank of England is ruling out imminent rate cuts while Eurozone inflation just fell to 2.8%, well below the previous reading of 3.2%. This supports using options to build a long GBP/EUR position, as the fundamental picture favors the pound over the euro.
Gold holding strong above $4,050, even with a hawkish Fed, is a significant sign of underlying demand. This isn’t surprising, as central banks globally added over 1,000 tonnes to their reserves in both 2022 and 2023, creating a solid floor for prices. We should view any dips caused by a temporarily strong dollar as potential opportunities to buy gold call options.
