EUROPEAN FX UPDATE: DXY declines pre-NFP whilst EUR outperforms on NS1 hopes

Analysis details (09:36)

DXY

The index’s overnight pullback has picked up pace in early European hours. DXY came to a whisker away from printing at 110.00 at 109.99, before trundling lower to the current intraday low of 109.27, potentially also as the EUR cheers expectations of a resumption of Nord Stream 1 flows this weekend. “All considerations on whether the dollar rally is truly overstretched and bound for correction will likely have to wait for today’s jobs numbers out of the US.”, analysts at ING posit, as they suspect that the market only needs a “respectable” jobs report to fully price in a 75bps September hike by the FOMC. Eyes will also turn to the wages metrics for evidence of a wage-price spiral, which the Fed is keen to avoid. In terms of technicals, there isn’t much in terms of support and resistance aside from the psychological 109.00 and 110.00 marks to the downside and the upside respectively, whilst the 10 DMA is at 108.85 today.

EUR, GBP

The EUR stands as the best performer this morning, partly due to a Dollar pullback and hawkish ECB commentary/forecasts, but also likely from reports that Nord Stream 1 flows are expected to resume on Saturday – although this is in line with the three-day schedule announced by Gazprom and is yet to occur. EUR/USD re-eyes parity at the time of writing, and the pair also sees several major OpEx for the NY cut: 0.9900 (EUR 1.8bln), 1.0000-05 (EUR 1.94bln), 1.0020-25 (EUR 1.44bln), 1.0050 (EUR 1.01bln). In terms of ECB calls for next week, BNP Paribas joined BofA, GS, Nordea, and Danske Bank in forecasting a 75bps hike, but ING opts for a 50bps increase as it keeps the door open for further hikes. Elsewhere, the Sterling is firmer vs the USD but softer vs the EUR. GBP/USD clambers off its 1.1533 low but still has some way to go to reach yesterday’s 1.1625 high (vs 1.1497 trough), whilst the 10 DMA (at 1.1706 today) has been acting as resistance since mid-August. The gains in EUR/GBP have been capping the upside for Cable as the cross trims about half of the prior day’s downside. Price action today will likely be dictated by the USD and its reaction to the US jobs report.

AUD, NZD, CAD

All modestly firmer to varying degrees. AUD/USD is the top high-beta performer whilst NZD/USD sees gains capped following the mixed Terms of Trade data overnight, and as the AUD/NZD cross sits above its 10 DMA (1.1180). The Loonie fluctuates with price action in the oil complex, with USD/CAD contained in a tight range.

JPY

The JPY fails to benefit from the USD weakness and sits above 140.00 in a 139.88-140.43 range, with the rise in EUR/JPY and flat US yields possibly negating a fall in USD/JPY, whilst overnight, Japanese Finance Minister Suzuki said recent FX moves are big and they will take appropriate action on FX if necessary. “Shorter-dated implied option volatilities were still around the 12% area (versus 15%+ a few months ago) suggesting investors have downscaled fears over possible Japanese FX intervention to sell USD/JPY”, says the desk at ING. 

Yuan

Another notably firmer-than-expected CNY fixing overnight (6.8917 vs exp. 6.9202) proved to be somewhat futile and was accompanied by a plethora of commentary from Chinese officials on the economy following a string of mostly disappointing data and renewed lockdowns in large cities, which in turn triggered policy easing. USD/CNH meanders around 6.9100 in a 6.9050-9167 range.

02 Sep 2022 - 09:35- Research Sheet- Source: Newsquawk