The US dollar posted its best monthly performance since July, and the Bank of England may unexpectedly cut interest rates by 25 basis points next week.
2025-11-01 07:16:56
The yen recorded a significant monthly decline against the dollar in Friday's trading. This move was mainly due to the Bank of Japan's more dovish stance on the future path of interest rate hikes than the market had expected, disappointing traders. Meanwhile, recent comments from Federal Reserve officials also dampened market expectations for a December rate cut, jointly strengthening the dollar and putting pressure on the yen.
The Bank of Japan's policy moves were the focus of market attention this week. Although data showed that Tokyo's core inflation rate accelerated in October and remained above the central bank's 2% target, and Finance Minister Satsuki Katayama stated that he was monitoring exchange rate movements with a high degree of urgency, providing some support for the yen, these positive factors were offset by the dovish comments from the Bank of Japan governor.
After keeping interest rates unchanged at 0.5% this week, Bank of Japan Governor Kazuo Ueda released a less hawkish signal than the market expected regarding future rate hikes, which became a key factor suppressing the yen's performance.
However, some analysts remain confident in the normalization of Japan's monetary policy. Noel Dixon, global macro strategist at State Street Global Markets, said he remains constructive on the yen, adding, "The Bank of Japan will ultimately have to normalize policy to at least 1%." He further noted that wage growth prospects and potential fiscal expansion will support this trend.
Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG Securities, offered a more specific timeline. He believes that Kazuo Ueda's speech actually released multiple signals that the likelihood of a near-term interest rate hike by the Bank of Japan is increasing unless the US economy or markets experience a major shock. Yamaguchi predicts, "Given Ueda's use of the term 'preliminary trend,' we believe the Bank of Japan is unlikely to wait until the March wage results are released," and he expects the Bank of Japan to take action in December.
Despite these long-term bullish views, the yen was largely unchanged on Friday, but fell 4.2% against the dollar for the entire month of October, marking its worst monthly performance since July.
Atlanta Fed President Bostic said on Friday that a December rate cut is not a certainty, regarding the Federal Reserve's rate cut this week. He emphasized, "I would say that any meeting is possible; we don't have a predetermined path, and we will let the information guide us." He also pointed out that Fed Chairman Powell's statement earlier this week after the policy meeting that a rate cut at the end of the year was not a certainty was a "positive sign."
In contrast, Federal Reserve Governor Waller adopted a different stance. He stated that given signs of weakness in the labor market, even with the lack of official economic data during the government shutdown, he still believes the Fed should cut interest rates again in December. Waller clearly stated, "We know inflation will fall, which is why I still advocate for a rate cut in December. All the data tells me we should do it."
These mixed signals have influenced market expectations for interest rate cuts. According to the CME Group's FedWatch tool, federal funds futures traders now predict a 63% probability of a December rate cut, down from 93% a week ago.
The dollar index rose 0.35% to 99.82 on Friday, marking a 2% monthly gain and its best performance since July, influenced by differing expectations regarding monetary policy. Noel Dixon of State Street commented that he expects the dollar index to consolidate below the technical resistance level of around 102 and strengthen if economic growth accelerates next year. He added, "From a positioning perspective, it's clear that investors—at least in terms of actual funds—have reached their limit on short positions, so I think it's difficult to short the dollar now."
The broad-based rise in the dollar also pressured other major currencies. The euro fell 0.37% to $1.1522, and has fallen 1.8% this month. This followed the European Central Bank's decision on Thursday to keep interest rates unchanged at 2% for the third consecutive meeting, reiterating that policy was in a "good position." ECB Governing Council member Villeroy de Gallo said on Friday that the central bank must remain open to interest rate actions at its upcoming meeting to address various risks, including those from financial markets.
The pound fell 0.14% to $1.3132, its lowest level since April 14, mainly due to increased political pressure surrounding Chancellor Reeves. The pound is expected to fall 2.3% this month. Market concerns that Reeves' November budget could negatively impact businesses, households, and overall economic activity are fueled by rising expectations among traders for a Bank of England interest rate cut.
In a report, Danske Bank analyst Kirstine Kundby-Nielsen made a bold prediction, suggesting the Bank of England might unexpectedly cut interest rates by 25 basis points to 3.75% next Thursday, leading to further weakness in the pound. She stated, "We believe the path to a rate cut at the November meeting, while narrow, is clear." However, she also noted that the Bank of England might make a final rate cut in February, given the country's robust economic performance and inflation remaining above the 2% target.
The Bank of Japan's policy moves were the focus of market attention this week. Although data showed that Tokyo's core inflation rate accelerated in October and remained above the central bank's 2% target, and Finance Minister Satsuki Katayama stated that he was monitoring exchange rate movements with a high degree of urgency, providing some support for the yen, these positive factors were offset by the dovish comments from the Bank of Japan governor.
After keeping interest rates unchanged at 0.5% this week, Bank of Japan Governor Kazuo Ueda released a less hawkish signal than the market expected regarding future rate hikes, which became a key factor suppressing the yen's performance.
However, some analysts remain confident in the normalization of Japan's monetary policy. Noel Dixon, global macro strategist at State Street Global Markets, said he remains constructive on the yen, adding, "The Bank of Japan will ultimately have to normalize policy to at least 1%." He further noted that wage growth prospects and potential fiscal expansion will support this trend.
Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG Securities, offered a more specific timeline. He believes that Kazuo Ueda's speech actually released multiple signals that the likelihood of a near-term interest rate hike by the Bank of Japan is increasing unless the US economy or markets experience a major shock. Yamaguchi predicts, "Given Ueda's use of the term 'preliminary trend,' we believe the Bank of Japan is unlikely to wait until the March wage results are released," and he expects the Bank of Japan to take action in December.
Despite these long-term bullish views, the yen was largely unchanged on Friday, but fell 4.2% against the dollar for the entire month of October, marking its worst monthly performance since July.
Atlanta Fed President Bostic said on Friday that a December rate cut is not a certainty, regarding the Federal Reserve's rate cut this week. He emphasized, "I would say that any meeting is possible; we don't have a predetermined path, and we will let the information guide us." He also pointed out that Fed Chairman Powell's statement earlier this week after the policy meeting that a rate cut at the end of the year was not a certainty was a "positive sign."
In contrast, Federal Reserve Governor Waller adopted a different stance. He stated that given signs of weakness in the labor market, even with the lack of official economic data during the government shutdown, he still believes the Fed should cut interest rates again in December. Waller clearly stated, "We know inflation will fall, which is why I still advocate for a rate cut in December. All the data tells me we should do it."
These mixed signals have influenced market expectations for interest rate cuts. According to the CME Group's FedWatch tool, federal funds futures traders now predict a 63% probability of a December rate cut, down from 93% a week ago.
The dollar index rose 0.35% to 99.82 on Friday, marking a 2% monthly gain and its best performance since July, influenced by differing expectations regarding monetary policy. Noel Dixon of State Street commented that he expects the dollar index to consolidate below the technical resistance level of around 102 and strengthen if economic growth accelerates next year. He added, "From a positioning perspective, it's clear that investors—at least in terms of actual funds—have reached their limit on short positions, so I think it's difficult to short the dollar now."
The broad-based rise in the dollar also pressured other major currencies. The euro fell 0.37% to $1.1522, and has fallen 1.8% this month. This followed the European Central Bank's decision on Thursday to keep interest rates unchanged at 2% for the third consecutive meeting, reiterating that policy was in a "good position." ECB Governing Council member Villeroy de Gallo said on Friday that the central bank must remain open to interest rate actions at its upcoming meeting to address various risks, including those from financial markets.
The pound fell 0.14% to $1.3132, its lowest level since April 14, mainly due to increased political pressure surrounding Chancellor Reeves. The pound is expected to fall 2.3% this month. Market concerns that Reeves' November budget could negatively impact businesses, households, and overall economic activity are fueled by rising expectations among traders for a Bank of England interest rate cut.
In a report, Danske Bank analyst Kirstine Kundby-Nielsen made a bold prediction, suggesting the Bank of England might unexpectedly cut interest rates by 25 basis points to 3.75% next Thursday, leading to further weakness in the pound. She stated, "We believe the path to a rate cut at the November meeting, while narrow, is clear." However, she also noted that the Bank of England might make a final rate cut in February, given the country's robust economic performance and inflation remaining above the 2% target.
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