USD/JPY back above 149.00

The FX market, particularly USD/JPY, has been on a rollercoaster ride with volatility reigning supreme. On one side, surging energy prices and the looming threat of Israeli retaliation against Iran are stoking stagflation fears. At the same time, there’s still a glimmer of hope that Beijing might swoop in with a fiscal stimulus lifeline in October to reignite growth. In short, the market is hanging in the balance, waiting for the next big move, whether it comes from the Middle East or China.

U.S. exceptionalism is keeping the dollar firmly in control, as China and Europe's economic fortunes continue to falter. And if Israel targets Iran, oil prices could skyrocket, sending shockwaves through global trade and crushing oil-importing nations. The bond market is already staring down the barrel of stagflation, with the bear flattening of the 2-10 curve flashing warning signs for the global economy. This stagflationary threat is keeping the dollar on the offensive.

Typically, the euro would benefit from China's stimulatory rate cuts, with EUR/USD banking on a China-driven reflation trade. But with Beijing keeping its powder dry on the fiscal front, the euro has struggled to break above the 1.1000 mark. The chaos in the Middle East and the looming surge in oil prices are massive headwinds for the euro this month, limiting its upside potential.

But the real action continues to be in USD/JPY, which is hovering above 149 ahead of the Tokyo open. After a sharp post-jobs report rebound, the downward momentum faded as traders blotted out expectations for jumbo Fed rate cuts. Meanwhile, Japan’s government is on high alert. Economic Revitalization Minister Ryosei Akazawa is backing the BoJ’s stance, including potential future rate hikes, as long as they don’t cause a market shock—an increasingly tall order. PM Ishiba, on the other hand, is carefully walking back earlier comments hinting at stronger opposition to BoJ tightening. It’s all about keeping the masses content with strong stocks and USD/JPY anchored below 150, especially with the October 27th election looming large.

The real concern? Yen weakness. If USD/JPY breaks above 150, it could trigger a flood of yen selling, hammering Japanese households already squeezed by inflation. The ruling LDP is keen to avoid this scenario, so they’ve promised a post-election stimulus package to ease the burden on consumers.

And let’s not forget—the BoJ’s meeting on October 31st will be pivotal. Updated inflation forecasts could cool expectations of an imminent rate hike, but the bigger focus remains on the U.S. Fed and the upcoming U.S. elections. A Trump victory, which is gaining momentum in the betting markets, could easily send USD/JPY soaring past 150, fueled by rising 10-year bond yields and the prospect of an even bigger deficit.