TD Securities strategists report that the US Treasury buyback announcement on August 19 led to a nearly 10 basis point drop in the 30-year Treasury yield, resulting in a bull flattening of the yield curve. Historically, such bull flattening, especially when accompanied by rising US equities, has weighed on the US Dollar Index (DXY), with the USD experiencing an average decline of -0.3% instead of a typical 1.74% rally during risk-off shocks. The current combination of muted US CPI, negative July retail sales data, and concerns over US institutional credibility and potential financial repression have reinforced the bearish momentum for the USD, which has shifted to a bearish regime earlier than TD Securities anticipated for H2 2026. Market consensus continues to expect upside for US equities, but a US equity shock remains a significant tail risk for the USD in 2026. Additionally, markets are gradually pricing out near-term Fed rate hike expectations after recent US data disappointments, with TD Securities' base case being that the Fed will remain on hold for now [1].
Meanwhile, Brown Brothers Harriman’s Elias Haddad highlights that USD/JPY is testing key support at its 200-day moving average (158.34) as Japanese economic data strengthens. Japan's private sector growth reached a six-month high in August, with the composite PMI rising to 53.4 from 52.7 in July, driven by gains in both manufacturing and services. July CPI data met consensus expectations, with headline CPI at 1.9% year-over-year, core CPI ex. fresh food at 1.8%, and core CPI ex. fresh food & energy at 1.9%. However, both core measures remain below the Bank of Japan’s 2026 forecast of 2.5%. The swaps curve is pricing in an 82% probability of a 25 basis point BoJ rate hike to 1.25% at the September 18 meeting, with a total of 75 basis points of tightening expected over the next year. Haddad expresses skepticism that the BoJ will tighten more aggressively, citing contained inflation pressures and flat private consumption in Q2. He also notes that USD/JPY could continue to move lower due to the risk of a dovish Fed repricing, as the US labor market is balanced, wage growth aligns with the Fed’s 2% inflation target, and Fed policy remains restrictive [2].
Both sources highlight the impact of central bank policy expectations and recent economic data on currency movements. The US Dollar faces reinforced bearish momentum due to the Treasury buyback and a bull flattening yield curve, while the Japanese Yen is supported by firmer domestic data but remains sensitive to US monetary policy shifts. Market participants are closely watching upcoming central bank meetings and economic releases for further direction [1][2].
CONCLUSION
The US Dollar has entered a bearish regime earlier than expected, pressured by the Treasury buyback, bull flattening, and disappointing US data. The Japanese Yen is testing key technical support as domestic data firms, but its outlook remains tied to both BoJ and Fed policy expectations. Overall, currency markets are likely to remain volatile as traders assess evolving central bank stances and economic indicators.