EUROPEAN FX UPDATE: DXY attempts to claw back losses as UK inflation prints sub-forecasts and Chinese activity data reaction fizzles

Analysis details (09:56)

DXY

• A contained European morning thus far for the index after hovering in a tight 104.04-22 band in APAC and early European hours (before eking fresh highs) after yesterday’s post-US CPI low of 103.99 (vs a 105.73 Tuesday peak). “The move was, however, quite extreme”, says the desk at ING, “If position-squaring did play a role in exacerbating the size of the dollar correction, the depth of the drop in Treasury yields means the FX shifts have taken their cues from a substantial repricing of monetary policy expectations”.


• As things stand, Fed pricing telegraphs a 99% chance of a hold at the final FOMC meeting of the year, with the first full 25bps rate cut priced in for June 2024. FOMC voter Goolsbee hit the wires in the US afternoon and suggested the progress in inflation continues, economic growth has been strong, and labour markets are vibrant, while he added that they still have a way to go before the Fed's 2% inflation goal is reached.


• According to ING's short-term fair value model, the USD has moved into undervaluation (after the US CPI release) against all G10 currencies ex-JPY, CAD, and NOK, marking a significant shift from its previous multi-month overvaluation according to the model. “Our view is that this USD bear run is overdone, and we expect another, or a few more rounds of dollar resilience into the New Year before a clear-cut dollar decline can emerge”, says the Dutch Desk


• Near-term technicals for the DXY remain sparse following yesterday’s mammoth move, the index meanders around its 100 DMA (104.17) at the time of writing with the next obvious support level the 200 DMA at 103.61 ahead of the 1st September trough at 103.27, whilst the closest upside levels (omitting round and half-round numbers) being yesterday’s 105.73 high.


• Ahead, the US Retail Sales and PPI data for October will be closely watched for further signs of economic health. A softer metric could fuel further dovish Fed bets, while strong data might induce some Dollar strength. Aside from data, US President Biden is due to meet Chinese President Xi at 18:45GMT/13:45EST, but no meaningful breakthrough is expected (Full Newsquawk primer available here)

GBP, EUR

• Sticking with the inflation theme, UK CPI showed a faster-than-expected deceleration in both headline and core metrics - CPI YY 4.6% vs. Exp. 4.8% (Prev. 6.7%), UK Core CPI (Oct) 5.7% vs. Exp. 5.8% (Prev. 6.1%) – while All Services printed at 6.6%, undershooting the BoE’s 6.9% forecast. 


• A dovish move was seen in market pricing at the open with the first rate cut now fully priced in for June 2024 (vs August pre-release). GBP/USD slipped from a 1.2499 high set overnight to a post-UK CPI low of 1.2458 at the time of writing, well within yesterday’s 1.2261-2505, with the 200 DMA at 1.2439 and 100 DMA at 1.2512.


• EUR/USD holds onto a lion’s share of yesterday’s gains after being catapulted from a 1.0692 low to a 1.0887 peak following the US CPI. ECB’s Villeroy spoke after the European close and expressed confidence that inflation will return to the 2% target by 2025. ECB’s Centeno spoke on Bloomberg TV this morning and said ECB must be patient with policy and does not see reasons to accelerate APP QT.


• In terms of technicals, the pair has come off those best levels but remains north of 1.0850 as it eyes several NY-cut options expiries including 1.0800 (EUR 1.6bln), 1.0850 (EUR 1.1bln), and 1.0875 (EUR 1.3bln). The pair also sees its 200 DMA at 1.0803 and 100 DMA at 1.0791. Analysts at ING “are inclined to think a pull-back to the 1.0800 mark is appropriate given short-term valuation (EUR/USD 1.5% overvalued). Conversely, a break above 1.0900 (probably on more US data weakness) would be significant and make 1.1000 the next key resistance.” EUR/GBP trades within a 0.8700-26 range with earlier upside being a function of the softer UK inflation data.

JPY, Yuan

• Largely flat intraday trade in the Yen and Yuan, with the latter retracing the strength seen on the release of better-than-expected Chinese activity data overnight despite a lack of pertinent headlines in the European morning.


• To recap, Chinese Retail Sales printed at 7.6% vs. Exp. 7.0% (Prev. 5.5%) while Industrial Output came in at 4.6% vs. Exp. 4.4% (Prev. 4.5%). USD/CNH saw downside upon the release to a 7.2382 trough, briefly dipping under the 1st September low of 7.2390 (vs 7.2662 high) before reversing in European hours to trade around 7.2600 at the time of writing. Technicians also note USD/CNH Fib supports at 7.2424 and 7.2128. As mentioned in the USD section above, Chinese President Xi and US President Biden are set to meet on the sidelines of the APEC summit for the first time since the G20 summit last year, but no major thawing in relations is expected. (Full Newsquawk primer available here).


• USD/JPY is now flat intraday after seeing modest strength overnight with some desks citing Tokyo fix Gotobi demand as one of the potential factors alongside the softer-than-expected Japanese Q3 GDP metrics (QQ -0.5% vs. Exp. -0.1% (Prev. 1.2%, Rev. 1.1%); Annualised -2.1% vs. Exp. -0.6% (Prev. 4.8%, Rev. 4.5%)). The pair has pulled back from overnight highs of 150.79 (vs intraday low 150.26) towards European lows of 150.33 at the time of writing in conjunction with a loss of upward momentum in stocks, although bond yields remain stable. In terms of OpEx for the NY cut, USD/JPY sees USD 1.4bln rolling off at strike 150.00. EUR/JPY and GBP/JPY have also come under pressure in recent trade, with the former approaching 163.00 (from a 163.94 high) and the latter under 187.50 (vs a 188.29 peak).

AUD, NZD, CAD

• The non-US Dollars see a mixed picture with the NZD outperforming, the AUD flat and the CAD lagging.


• AUD/USD is little changed intraday after seeing a modest uptick on the strong Chinese activity data overnight, but gains upside is capped following mostly in-line (but hotter-than-prior) Australian Wages metrics ahead of the Labor Force survey tomorrow which expects an uptick in the Unemployment Rate. AUD/USD briefly fell under its 100 DMA (0.6490) as it now meanders around 0.6500 in a 0.6483-6516 range.


• NZD/USD is the marked outperformer following the Chinese data boost coupled with the AUD/NZD cross falling under its 50 DMA (1.0797), 100 DMA (1.0807) and 200 DMA (1.0809). NZD/USD extends gains above yesterday’s 0.6014 peak to the current intraday high of 0.6041. USD/CAD also edges higher as a function of the declines in the crude complex, with the pair back above 1.3700 after notching a 1.3677 APAC trough.

15 Nov 2023 - 10:02- Research Sheet- Source: Newsquawk