EUROPEAN FX UPDATE: DXY pivots 103.50 while Kiwi slides post-RBNZ and Sterling briefly popped on inflation data

Analysis details (09:50)

DXY

DXY is on a softer footing just under 103.50 after trading on either side of the psychological level overnight and printing a Tuesday session high of 103.65, with the index remaining under pressure due to continued uncertainty around US debt ceiling talks. To recap, GOP Representatives Graves and McHenry revealed yesterday that there are still substantial disagreements, particularly over the debt limit duration and spending, and there are no scheduled meetings to resume negotiations at the moment. Back to today’s price action, the index remains somewhat caged in the run-up to the FOMC minutes later, although the minutes could prove to be stale, given the more recent Fedspeak markets have heard. Analysts at ING posit that “the debt ceiling threat seems to be posing an ephemeral risk to markets and instead the core focus is on US activity and prices holding up - questioning whether the Fed needs to deliver any rate cuts later this year.” – whilst markets continue to price in full rate cuts by November this year. From a technical standpoint, the index remains within yesterday’s 103.16-65 parameter. 

NZD, AUD, CAD

The non-US dollars reside as the current G10 laggards. NZD experienced a significant drop after the RBNZ signalled an end to its tightening cycle in what was a dovish hike. NZD/USD slumped from a 0.6256 high, through its 50 DMA (0.6232) and then under its 200 DMA (0.6156) to a current session low of 0.6132. AUD slipped and remains soft in tandem with the broader risk tone and losses across base metals. AUD fell under the 28th April low (0.6573) from a 0.6615 intraday high as it eyes the 10th March low for support at 0.6563 – having printed an intraday low of 0.6568 thus far. The downside for the Aussie is somewhat cushioned by the NZD-induced rise in AUD/NZD amid central bank divergence, with the cross rising from a 1.0567 low to levels north of 1.0700 but just shy of its 50 DMA at 1.0723. The Loonie is also subdued amid its high-beta properties but with its downside limited as crude prices hold up. USD/CAD topped its 50 DMA (1.3526) from a 1.3493 base as it eyes yesterday’s high at 1.3548.

EUR, GBP

Both tilting higher vs the Dollar but off best levels. GBP was briefly lifted following the hotter-than-expected UK inflation data which solidified the case for a June BoE hike. Annual headline rate eased to 8.7% Y/Y from 10.1%, but printed above the expected 8.2%; the core measure rose to 6.8% Y/Y from 6.2% against expectations that it would be unchanged in the month. Meanwhile, the increase in core inflation has pushed the annual measure beyond the previous perceived peak of 6.5% in April of the previous year, reaching the highest levels since 1992. This rise was attributed to an increase in prices for core goods, while the growth in services inflation from 6.6% to 6.9% exceeded the BoE's forecast of 6.7%. "In other words, the recent resilience of economic activity appears to be stoking domestic inflationary pressure," Capital Economics said. Ahead, BoE Governor Bailey is due to make an appearance with the Wall Street Journal this afternoon. GBP/USD rose to a 1.2469 high on the back of the data before succumbing to the Dollar and receding towards 1.2430 (vs intraday low 1.2403). EUR/USD resides around the middle of today's current 1.0794-1.0768 with little reaction seen on the back of the downbeat German Ifo survey which highlighted the German economy is heading towards stagnation in Q2. Earlier, ECB President Lagarde reiterated the ECB will bring rates to sufficiently restrictive levels and keep them at those levels for as long as necessary. In terms of notable option expiries for today’s NY cut, EUR/USD sees around EUR 1.3bln rolling off between 1.0750-60.

JPY, CNH

The JPY is flat intraday and resilient to the recent Dollar. The pair earlier matched yesterday’s low around 138.23 but remains within a tight 138.23-73 band in the run-up to the FOMC minutes. Elsewhere, the CNH is modestly firmer intraday despite the ongoing and rising US-China tensions, which saw the US blacklisting a Chinese tech firm in response to Beijing deeming US’ Micron a national security risk.

24 May 2023 - 09:53- Fixed IncomeResearch Sheet- Source: Newsquawk