19/09/2025 Market Watch

Diverging Signals Shape Market Moves

Key Takeaways:

  • Dollar rallied as investors reduced shorts after Fed signals.
  • Bank of England held rates, slowed pace of QT, and leaned dovish.
  • Bank of Japan held rates but signaled hawkish momentum with two dissenters.
  • Yen rebounded, sterling weakened, Aussie and Kiwi underperformed.

The US dollar extended its rally yesterday as investors scaled back short positions, reflecting the lack of dovish momentum from the latest Fed meeting. The S&P 500 gained 0.5% to a new record high, while European equities rose 1.6%, supported by resilient risk sentiment. US Treasury yields edged higher across the curve following stronger-than-expected jobless claims, reinforcing confidence in the labor market. The dollar index is up 0.7% since Thursday morning, while the Australian dollar was among the weakest currencies due to soft labor data and position unwinding by funds.

The Bank of England voted 7-2 to keep rates unchanged at 4.0%, with two members preferring a cut, underlining rising recession concerns. Governor Bailey emphasized balanced risks, while the committee opted to slow the pace of quantitative tightening over the next year, targeting £70bn in sales focused on shorter maturities. Despite the more dovish tone, long-dated gilt yields rose and sterling weakened, with EURGBP breaking above 0.8700.

The Bank of Japan also held rates at 0.50%, but the meeting carried a hawkish surprise with two members voting for a hike, the first such dissent since Governor Ueda took office. Japanese core CPI printed 3.3%, above expectations, highlighting persistent cost pressures. The outcome increases the likelihood of a rate hike as early as October. Equities responded negatively, with the Nikkei 225 falling 0.5%, while USDJPY consolidated after recent dollar-driven gains.

Currency markets reflected diverging central bank paths. The yen rebounded on the hawkish BoJ tilt, while sterling faced pressure after the BoE decision. The Kiwi remained the weakest G10 currency following a surprise GDP contraction, and the Aussie struggled on weak jobs data. By contrast, the Swiss franc led gains, followed by the Canadian dollar and euro. With upcoming data such as German PPI, UK retail sales, and Canadian retail sales, markets may see near-term volatility, but central bank divergence continues to dominate sentiment.

United States of America

Overview

The dollar was supported yesterday by stronger-than-expected labor market data, which prevented a near-term pullback after the Fed meeting. Initial jobless claims fell to 231k in the week ending 13 September, reversing the prior spike, while continuing claims dropped to 1920k against expectations of 1950k. Last week’s figures were also revised lower, underscoring that the labor market, while softening, still shows pockets of resilience.

Despite the positive surprise, the broader trend continues to point toward labor market deterioration, and inflation remains subdued. This keeps the Fed on track for further easing, with markets anchored by the Dot Plot projection of two additional cuts this year. As such, the hurdle for a hawkish repricing and a stronger dollar remains high, although near-term support is likely.

Attention today will also turn to geopolitics. A scheduled call between President Trump and President Xi Jinping on TikTok’s US ownership could expand to broader trade issues, with potential market implications. Such direct engagements have historically produced supportive headlines for risk sentiment, particularly influencing China-linked currencies like the Australian dollar and New Zealand dollar.

Economic Drivers

  • Labor market resilience with initial jobless claims falling to 231k and continuing claims easing to 1920k.
  • Fed’s Dot Plot signaling two more rate cuts this year, keeping expectations anchored.
  • Market perception that cheaper funding costs will drive hedging demand for USD.
  • Geopolitical focus on US-China relations, particularly around technology and trade.

Data and Events

No major economic releases are scheduled today.

Price Action

  • Dollar remained supported by stronger US data, limiting downside after Fed-driven volatility.
  • Market still views the dollar as trading on the strong side, with expectations of some near-term pullback.
  • Hedging demand likely to underpin USD, preventing deeper declines.

Key Points:

  • Jobless claims fell back sharply, easing fears of renewed labor market weakness.
  • Fed remains on track for further rate cuts as inflation stays muted.
  • Dollar remains strong in the short term, but a pullback is likely.
  • Geopolitical focus shifts to US-China discussions with potential trade implications.
  • Market remains anchored by Fed Dot Plot guidance.

Europe

Overview

The euro has shown resilience in recent sessions despite external and domestic pressures. EUR/USD has been supported above 1.1650, with markets focusing on the contrasting policy paths of the Federal Reserve and the European Central Bank. The Fed’s recent 25bp rate cut has reinforced expectations of further easing, while the ECB is widely seen as nearing the end of its cycle, offering relative stability for the euro.

French politics remain a source of risk. The new prime minister faces strong union opposition to fiscal reforms, and negotiations with the Socialists to pass the budget have stalled. This backdrop follows the recent French debt downgrade, yet the broader euro impact has been limited. The OAT-Bund 10y spread remains wide at 80bp, though the pace of further widening will be closely watched for potential spillover risks.

Overall, euro support is underpinned by the divergence in monetary policy outlooks between the Fed and ECB, though political and fiscal challenges within the Eurozone remain key factors for investor sentiment.

Economic Drivers

  • Policy divergence with Fed expected to cut rates further while ECB maintains a steady stance at 2%.
  • Contained euro spillover from France’s recent debt downgrade despite wide OAT-Bund spreads.
  • Political challenges in France with union opposition to fiscal reforms and stalled budget negotiations.
  • Mixed Eurozone fundamentals, including sluggish growth and revised inflation figures.
  • Sensitivity to US and EU employment and inflation data.

Data and Events

  1. 19 September 2025: German PPI

Price Action

  • EUR/USD trading supported above 1.1650 with recent fluctuations between 1.1750 and 1.1820.
  • Momentum tilted to the bullish side with potential to climb back to 1.1850 in the near term.
  • Break above 1.1870 could open room toward 1.1900, while failure to hold the 50-day moving average risks a drop to 1.1560.
  • Broader outlook remains constructive as long as support levels are maintained.

Key Points:

  • EUR/USD supported by Fed-ECB policy divergence.
  • French political and fiscal risks remain, but euro impact contained so far.
  • OAT-Bund spreads remain wide but manageable.
  • Eurozone growth and inflation trends will guide sentiment.
  • Technical structure supports potential gains toward 1.1850.

Japan

Overview

The Bank of Japan kept rates unchanged at 0.5% this morning, but two members dissented in favor of a hike, which markets are interpreting as a clear hawkish signal. This is the first time dissent has emerged in this direction under Governor Ueda, strengthening expectations for a possible rate increase at the October meeting. Market pricing now embeds around 14bp for October and 19bp by year-end.

Another development was the decision to begin gradually reducing ETF holdings at a pace of approximately $4.2bn in market value per year. Given that total ETF holdings stood near $505bn in March, the scale of this reduction is modest, and unlikely to have any material impact in the near term. Political uncertainty following Prime Minister Ishiba’s resignation adds further complexity, but monetary policy signals remain the primary driver for yen sentiment.

Overall, the hawkish shift in voting dynamics suggests the BoJ is inching closer toward normalization, while divergence with the Fed’s easing stance is likely to shape USD/JPY direction in the months ahead.

Economic Drivers

  • BoJ decision to keep rates at 0.5% but with two dissenters favoring a hike, strengthening the case for October tightening.
  • Modest ETF offloading of $4.2bn annually versus total holdings of $505bn, with limited near-term impact.
  • Political uncertainty following Prime Minister Ishiba’s resignation adds complexity to Japan’s policy outlook.
  • Divergence between Fed easing bias and BoJ’s patient but gradually hawkish stance.
  • Balancing act between export competitiveness and persistent domestic inflation pressures.

Data and Events

  1. 19 September 2025: National Core CPI
  2. 19 September 2025: BOJ Policy Rate
  3. 19 September 2025: Monetary Policy Statement
  4. 19 September 2025: BOJ Press Conference

Price Action

  • USD/JPY remains elevated, with current levels above the 100-day moving average at 146.25.
  • 200-day moving average at 148.65 acting as resistance, with potential extension toward 150.9 if breached.
  • Pair viewed as overvalued relative to short-term fair value of 145.7, suggesting scope for yen gains on hawkish repricing.
  • Diverging Fed-BoJ policies point to sustained volatility rather than a clean directional breakout.

Key Points:

  • BoJ held rates but two dissenters voted for a hike, reinforcing October hike expectations.
  • ETF reduction pace is minimal relative to total holdings.
  • Market pricing reflects higher probability of year-end tightening.
  • USD/JPY remains technically supported but overvalued on a fair value basis.
  • Political uncertainty in Japan adds another layer to market sentiment.

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