EUROPEAN FX UPDATE: DXY off lows on risk, EUR whipsawed on Schnabel and PMIs, AUD is subdued by RBA while CNY and INR saw overnight intervention.

Analysis details (09:25)

DXY

• Initially a positive European session for the broader Dollar and index following an APAC session of sideways trade between the 103.53-66 parameters. The index then edged higher as European players reacted to the overnight risk aversion coupled with EUR losses after ECB’s Schnabel early doors, who suggested that the current level of restriction is sufficient and has increased confidence that the 2% inflation target will be met in 2025 (more below). The index then came off highs and the EUR trimmed losses post-PMIs to trade around the middle of the 103.53-84 band at the time of writing.


• DXY extended the upper end of its overnight range towards 103.84 ahead of the equity cash open – almost matching yesterday’s 103.85 high after finding APAC support near its 200 DMA (103.56). In terms of other nearby levels – the 10 DMA resides around 103.36, the 21 DMA at 104.08, the 22nd Nov high at 104.21, then the 100 DMA at 104.402.


• Ahead, amid the absence of Fed speakers as they observe the blackout period, the focus will be on data – Final US composite and services PMIs from S&P Global will be released ahead of the Services ISM, where the headline is expected to slightly tick up to 52.0 from 51.8. JOLTs data will be eyed ahead of Friday’s official jobs report (note: the JOLTs data is for October, while Friday’s NFP results will be for November).

EUR, GBP

• EUR felt some losses in early European trade after ECB’s Schnabel hit the wires at 06:00 GMT to suggest that the current level of restriction is sufficient, has increased confidence that the 2% target will be met in 2025 but the ECB must not declare victory prematurely, whilst further hikes are “rather unlikely” after November's inflation data – commentary which led to a steady fall in EGB yields and the single currency. This, coupled with broader risk-induced Dollar strength, led to EUR/USD dipping under its 200 DMA (1.0819) after finding resistance near its 21 DMA (1.0850) at 1.0847. Thereafter, the revisions higher in Final Services and Composite PMIs from France and Germany took EUR/USD off lows and back above its 200 DMA. “The ECB confronts a pivotal decision: continue with interest rate hikes or place faith in the ongoing transmission of these hikes to prices. As of now, indications suggest a strong bias towards the latter choice”, the EZ release stated. Meanwhile, the ECB Survey of Consumer Expectations (October 2023) suggested median consumer inflation expectations for the next 12 months and for three years ahead remained unchanged from September. EUR traders will also be cognizant of a myriad of option expiries for the NY cut scatter between 1.08-09 at strikes 1.0800-05 (EUR 993mln), 1.0825-30 (EUR 2.5bln), 1.0850-60, (EUR 1.41bln), 1.0890-00 (EUR 1.91bln).


• Sterling sees losses as a function of the Dollar as opposed to its own factors, although losses could be cushioned amid the latest YouGov/Citi survey which showed the British public’s expectation for inflation in 5yr-10yr time rose to 3.5% from a prior 3.3% view in September, whilst UK BRC Retail Sales YY for November printed at 2.6% vs. Exp. 2.5% (Prev. 2.6%). EUR/GBP remains within yesterday’s 0.8557-85 range.

JPY

• The Japanese Yen is the G10 outperformer at the time of writing amid a combination of a pullback in US yields coupled with the broader risk aversion overnight. Tokyo's Core CPI, which is seen as a leading indicator of the national trend, printed softer than expected but failed to move the currency. USD/JPY has fallen under 147.00 from a 147.37 peak, down to a 146.67 low before losses were stemmed by gains in the Dollar at the time. The pair then retested 147.00 to the upside as the risk environment seemingly improved whilst bonds came off highs.

AUD, NZD, CAD

• All softer to varying degrees amid the initial broader risk tone, but the Aussie is the marked G10 laggard in the aftermath of the RBA policy decision which lacked the hawkish undertones some had expected based on Governor Bullock’s recent commentary. To recap, the RBA kept the Cash Rate Target unchanged at 4.35%, as expected, while it reiterated its forward guidance that whether further tightening is required to ensure inflation returns to the target in a reasonable timeframe will depend upon data and evolving assessment of risks. The RBA also repeated that the Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome, alongside noting there are still significant uncertainties around the outlook and that the limited information received on the domestic economy since the November meeting has been broadly in line with expectations. AUD/USD fell under its 200 DMA (0.6578) from a 0.6625 peak. NZD/USD dipped under yesterday’s 0.6148 low to trade within a 0.6174-6140 band. USD/CAD sits between its 100 DMA (1.3569) and 200 DMA (1.3515).

CNY, INR

• Yuan is flat intraday but saw mild losses after, Moody's revised China's outlook to negative but maintained the A1 rating. Concerns over gov't support for stressed RLGs & and SOEs, lower growth, and policy challenges drove the outlook change. China's strong economy and financial resources uphold the A1 rating. Encouraging Caixin Services PMI data which printed a 3-month high at 51.5 (exp. 50.7) only provided a brief tailwind. It was also reported overnight that China's major state-owned banks were seen acquiring dollars via onshore swaps and selling them in the spot FX market, while it was also reported that the RBI was likely selling dollars near the 83.38-83.39 rupee level, according to sources and traders cited by Reuters.

05 Dec 2023 - 09:25- ForexData- Source: Newsquawk