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The USD has resumed its depreciation after July’s corrective squeeze, driven by Fed cut expectations following the weak US jobs data on August 1. The futures market has priced in a 25-bps rate cut at the September FOMC meeting. However, markets will be watching two key events – the FOMC minutes on August 21 and the Kansas City Fed’s Jackson Hole Symposium on August 22-23 – for the Fed to lean against a larger 50 bps cut. The degree of the Fed’s dovish tone will determine whether the DXY Index starts to weaken within the lower price channel.
Fed Chair Jerome Powell’s speech on August 22 will be critical, where his tone and risk-management framing will provide a roadmap for rate cuts. Powell could calibrate decisions as minimizing the costs of being wrong, as he had done during Trump 1.0 in response to economic uncertainty and political pressure. Powell could highlight that waiting too long to resume rate cuts risks a sharper deterioration in the labour market, even as he cautions that excessive or rapid rate cuts may undermine the vigilance against tariff-induced inflation.
Beyond Powell’s speech, markets will also scrutinize how far President Trump has tilted the Fed’s internal balance away from Powell’s cautious stance. His nomination of Stephen Miran to succeed Adriana Kugler, who resigned as Governor on August 8, and his floating of Vice Chair Philip Jefferson as a possible successor to Powell signalled a bid to secure a pro-easing majority on the seven-member Board of Governors. The tilt was also evident from Trump-appointed Governors Michelle Bowman and Christopher Waller, who dissented at the July 30 FOMC meeting in favour of an immediate cut.
In positioning for the Fed to resume its rate-cutting cycle, we examine two currencies for policy divergences – the NZD, which is nearing the end of New Zealand’s easing cycle, and the JPY, for Japan returning to a rate hike later this year.
The NZD’s recovery could regain momentum within its four-month range of 0.5850-0.61. Despite the overwhelming view for an insurance rate cut this week, we will be watching for signals that the Reserve Bank of New Zealand’s easing cycle is approaching its end.
Barring a surprise, the expected 25 bps reduction on August 20 would bring the official cash rate to 3%, marking a cumulative 250 bps of cuts and placing the policy rate at the mid-point of its 2.5-3.5% neutral range, and the upper bound of the RBNZ’s 2-3% inflation target. Headline CPI inflation accelerated for the second quarter to 2.7% YoY in 2Q25 from 2.5% in 1Q25. The key question is whether the RBNZ remains confident in its prior projection for inflation to peak at 3% in 3Q25 before easing back towards 2% in early 2026. Doubts could emerge after last week’s RBNZ Household Expectations Survey showed inflation expectations continuing to firm across both the 1-year and 5-year horizons.
The risks for USD/JPY are tilting towards the downside. USD/JPY’s resistance at 148 has been intact after the weak US jobs data on August 1 brought it below 150. Last week’s GDP report alleviated recession fears that pressured the JPY in June and July. Real GDP growth was stronger-than-expected at 1.0% QoQ sa in 2Q25 vs. the 0.4% consensus, while the 0.2% contraction in 1Q25 was upgraded to a 0.6% expansion. Earlier on August 7, the government lowered its GDP growth forecast for the FY ending March 2026 to 0.7% from the previous 1.2% projection in January.
Soon after, US Treasury Secretary Scott Bessent remarked that the Fed and the Bank of Japan were behind the curve – the former in lowering rates and the latter in hiking. Although Japan’s officials responded that monetary policy should be left to the BOJ and its close coordination with the government, Bessent’s comments could re-anchor the “policy divergence” narrative and tilt the USD/JPY’s risks towards the downside.
While the OIS market continued to price in a later BOJ hike in December, it will pay attention to upside surprises in Japan’s National CPI data release on August 22. Consensus sees the BOJ’s main gauge, CPI inflation excluding food, easing to 3% YoY in July from 3.3% in June. USD/JPY needs to break below its month-long support level of 146 before it can head lower to 143.
Quote of the Day
“Let us not be bitter about the past but let us keep our eyes firmly on the future.”
Sukarno
August 18 in history
Sukarno was elected as the first President of Indonesia in 1945.
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