Powell in the spotlight, but don't forget about Ueda’s appearance in the diet

As we hinted earlier this week, we’re expecting some short-coverage of the dollar on the horizon, even though there hasn’t been a severe test of crucial levels on the latest pullback. But let’s not get too comfortable—coming out of Jackson Hole, there’s a decent chance that those hoping for Chair Powell to wave the “50 basis points rate cut” flag might face some dovish disappointment. (The same goes for stock markets) This is likely act one, with the real plot twist waiting in the wings when the NFP drops. Given how the weekly jobs data has been holding up, there’s a good chance the market could scale back the 100 basis points of cuts currently baked into the 2024 swap curve, giving the dollar some room to firm up.

So, when should we expect the dollar—and by extension, the broader currency market—to start dancing? Keep an eye on the 2-year UST note yield. However, the USD/JPY performs as expected, showing greater sensitivity to downside risks. This likely reflects the renewed market appetite for buying the yen on dips, especially after that swift 20-big-figure drop in July into early August. Plenty of structural ( derivative) yen shorts in the market, left exposed to appreciation risks, are now being hedged more aggressively. As long as Fed rate cut expectations stay strong, USD/JPY will have difficulty sustaining any rallies.

While all eyes will be on Powell, don’t forget that USD/JPY will also be influenced by BoJ Governor Ueda’s appearance in the Diet today (0930 Tokyo time). After all, Diet members are calling for Ueda to explain the BoJ’s actions following recent market turmoil. We expect Ueda to make a strong case for adjusting the policy stance, but he’ll likely emphasize caution—much like Deputy Governor Uchida did. The risk here is that Ueda’s cautious tone could reassure the Diet, leading to some yen depreciation, but with Powell’s speech looming, any yen sell-off will likely be kept in check.