EUR

The anticipation for a significant market reaction to the first substantial U.S. data release in weeks on Friday ended in disappointment. Interest remains surprisingly subdued, possibly overshadowed by broader narratives around trade and geopolitics. Despite the U.S. and China seemingly presenting a united front over the weekend, the wide range of potential outcomes has left market participants hesitant to commit strongly. This week, central banks are unlikely to provide much clarity either—the Federal Reserve appears to be on autopilot until more consistent data emerges, the ECB remains in a comfortable position, and the Bank of Japan (BOJ) is left as the potential source of any market excitement.

European PMIs delivered a solid performance overall, with the exception of France, whose underperformance can at least be attributed to political factors. This data challenges the skepticism surrounding European growth prospects. Meanwhile, the U.S. CPI report offered no major surprises, leaving little cause for alarm. I added to euro long positions, though execution was less than ideal, yielding only marginal gains against the dollar. I also went long on the euro against the Australian dollar, viewing it as a hedge against potential trade talk setbacks this week—though that position has been painful so far. Even Scandinavian currencies, which typically exhibit beta to improved European growth sentiment, have stalled. While they’ve already seen decent moves, I maintain some downside exposure in EUR/SEK.

On the U.S. CPI release, I sold some USD/JPY, encouraged by Takaichi’s comments, which aligned with expectations for a potential BOJ rate hike this week. We remain among the few holding out for such a move, and I’ll be watching for any last-minute reports to determine whether to maintain this short position into the event.

The European data helped ease concerns that optimism from earlier in the year might be fading. Germany’s fiscal measures, recently activated post-budget approval, should support growth, and our economist highlighted potential multiplier effects that could further boost the economy. With sentiment around the euro becoming increasingly divided in recent weeks—and even short positions emerging on the crosses—I decided to add to core long positions. However, the price action has been underwhelming, and flow remains lackluster, with a noticeable absence of dip buyers to strengthen conviction. For now, I see decent risk-reward opportunities around the 1.1540/50 support level, where I’m prepared to exit if breached. On the upside, I’m looking for a sustained move above the 50- and 100-day moving averages (1.1661/1.1687) to target a potential extension toward the 1.18 range highs.

GBP

The FX market remains in a state of unusual paralysis, with numerous headlines circulating and cross-asset movements (e.g., XAU). However, the ongoing U.S. government shutdown continues to obscure visibility into the U.S. economy, particularly the labor market. Unsurprisingly, market conviction remains low.

For sterling, attention is gradually shifting toward the upcoming Budget, now just a month away. Media focus is expected to intensify, with speculation likely to grow as potential policy leaks emerge. Last week, a hint of a manifesto shift regarding income taxes impacted GBP, but it’s still too early to assess credibility. Meanwhile, softer UK CPI data kept the rates market grounded, as excessive easing expectations have been adjusted. Currently, markets are pricing in 15 basis points for December and 30 basis points by February.

Efforts to achieve lower EUR/GBP over the past week were unsuccessful, with the pair fluctuating around the 0.87 level. The last time we saw a significant move below this range was in June. GBP was the least favored currency in the SHF sector last week, though this was counterbalanced by demand from DHF and corporates, while RM activity was neutral on a net basis.

No strong directional view exists at the moment. While EUR/GBP remains of interest, engagement is challenging near the top of the recent range. Key levels to watch are 0.8745/50 for EUR/GBP, with cable supported at 1.3250 and resistance at the 50-day (1.3455) and 100-day (1.3478) moving averages. The UK calendar is light until the MPC meeting next week.

JPY

Returning from my time off, I noticed Takaichi now seated alongside Katayama at the Ministry of Finance (MoF). While the market seems confident about the implications of this change, I remain uncertain. I anticipate Ueda’s actions this week will provide some clarity. JPMorgan remains an outlier, still advocating for a rate hike. Although my sympathies are limited, I believe it makes sense from a risk-reward perspective to go slightly long on JPY. Accordingly, I sold USDJPY upon returning to my desk this morning.

Those familiar with my commentary know I strongly believe in the pre-BoJ trial balloon strategy. With so little currently priced in, it would feel unusual for the Bank of Japan to surprise without some prior signals. Therefore, the strategy this week is to hold JPY longs. However, if there are no local leaks by Wednesday night, it might be prudent to square your positions before bed. I understand the argument—does it really matter if they hike 25 basis points now or in Q1? Will the terminal rate shift significantly?

That said, with Takaichi now in place, the market may draw some intriguing conclusions, and the resulting moves could be impactful. Notably, research indicates the market scrambled to go long USDJPY in the options space last week—a sentiment mirrored in our DHF net spot flow data. If Ueda delivers a dovish press conference following a hold, we’ll likely return to the familiar game of chicken with the MoF, but more on that later.

For now, keep an eye on 153.30 as the double top resistance level, with short-term support at 152.20 below.