FX Weekly - Heightened risk of intervention in the yen

EUR/USD downside looks limited

The dollar rally was strong last week. However, the options market sent a different signal for EUR/USD on Friday. The short-term bias became less negative, meaning there was less demand for puts. Normally, this points to a higher spot rate. EUR/USD did move higher, although with some delay. This suggests that the options market was clearly leading the spot market. We saw a similar pattern on Monday.

On Tuesday morning, the bias moved higher again, but spot did not follow because energy prices also rose. These developments suggest that EUR/USD may find it difficult to move below 1.1350 and stay there. For this signal to become more convincing, the bias first needs to move back to neutral and then turn positive. This would indicate stronger demand for calls than for puts.

Heightened risk of intervention in the yen

At the start of the week, the recovery in EUR/USD was also reflected in EUR/JPY. More broadly, yen weakness was evident in both USD/JPY and EUR/JPY. USD/JPY reached its highest level since 1986, suggesting that markets were testing the tolerance of the Japanese authorities, and possibly the US authorities as well. Since the beginning of July, markets have become increasingly nervous about the risk of yen intervention. This has led to some recovery in the yen against both the dollar and the euro, although the move has remained relatively modest so far. Positioning remains stretched: the market is long US dollars and extremely short yen. If sentiment shifts in favour of the yen, whether because of intervention concerns or other factors, the recovery could be much sharper. Indeed, USD/JPY may not return to this week’s levels for some time.

Small adjustment in EUR/USD

In recent FX Weeklies, we have discussed our EUR/USD view in detail. We still expect the US dollar to weaken more broadly. This view is based on a higher risk premium for US assets, greater attention to US structural imbalances, increased FX hedging, political uncertainty, and our more dovish view on the Fed. However, we have made a modest adjustment to our EUR/USD forecasts because of two developments. First, our economists have revised their ECB view. We now expect one more rate hike this year. As a result, our ECB view is no longer more hawkish than market consensus. At the same time, our Fed view remains more dovish than the market expects. Second, we expect the French elections in April 2027 to weigh on the euro in Q4 2026 and Q1 2027. However, we also expect the US mid-term elections to bring policy risks and uncertainty in the US back into focus. Taken together, these factors point to slightly less upside for EUR/USD this year and next year. Our new year-end forecast is 1.18 for 2026 and 1.23 for 2027.