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EUROPEAN FX UPDATE: DXY tilts firmer pre-CPI and GBP subdued post-GDP, while EUR looks ahead to ECB

Analysis details (10:05)

DXY

Overall on a modestly firmer footing but caged to a tight range above 104.50 in the run-up to the US CPI metrics later today, with annual headline US inflation expected to tick higher on higher energy prices, but the annual core inflation metric is seen lower.

Headline inflation is expected to rise 0.6% M/M in August, picking up in pace versus the 0.2% M/M printed in July; the annual headline is expected to rise to 3.6% Y/Y from 3.2%. The core rate is seen up 0.2% M/M, matching the prior month; the annual core rate is seen easing to 4.3% Y/Y from 4.7%. Higher energy prices are likely to drive the headline up, but the core rate is seen steady. (Full Newsquawk Preview available)

Analysts at Moody’s write "While inflation will continue to moderate, the path to 2% price growth will be slow and rocky," adding that "the ongoing decline in used-vehicle prices will provide some downward pressure, but the biggest shoe yet to drop is related to housing and rent prices, where weakness from late 2022 has yet to show up in the CPI."

From a technical perspective, the DXY remains within a tight 104.51-78 range, still within yesterday’s 104.46-91 parameter as markets await Tier 1 US data. Analysts at ING say “We are bearish on the dollar from the fourth quarter of this year, but this bearish narrative requires a few more weeks of patience. We favour DXY edging back to the top of its 104.50-105.00 range today.”

GBP, EUR

Both are modestly softer against the Buck whilst the GBP is modestly softer against the EUR. The morning saw the release of UK monthly GDP Estimates, which saw the MM, YY, and 3M metrics all print beneath expectations, with the ONS suggesting that “All of the main sectors fell in July 2023. Output in the services sector fell by 0.5% and was the largest contributor to the fall in monthly GDP; production output fell by 0.7% and construction output fell by 0.5%. This is the first month since June 2022 that all three sectors contributed negatively to GDP on the month.” In an immediate move, GBP/USD slipped some 30 pips before extending on losses and then trimming the downside, with market pricing for the September BoE being unreactive to the data, continuing to ascribe around a 75% chance to a 25bp hike occurring. To recap the price action, GBP/USD fell from a 1.2502 high to a 1.2441 trough before edging back above the 1.2450 mark, with traders cognizant of the 200 DMA at 1.2429 today.

The Single Currency meanwhile looks ahead to tomorrow’s ECB confab, whereby market pricing has tilted hawkishly following the recent source report which suggested that the 2024 inflation forecast is expected to be revised higher from the 3% in June. As such, markets now assign a 68% chance to a 25bps hike. EUR/USD felt a lift from the sources yesterday, but that upside has waned in the run-up to US CPI with EUR/USD back under 1.0750 in a 1.0732-64 band.

AUD, NZD, JPY

The antipodeans trade on either side of the spectrum, with the NZD resilient against the Buck following yesterday’s notable losses, whilst the AUD remains subdued by the woes in China alongside the broader cautious mood ahead of the US inflation metrics. The JPY meanwhile sees modest losses and US bond yields and the broader Dollar tilt higher, but price action remains contained. Further for the JPY, overnight reports via Nikkei stated there is a sense at the BoJ that December is too soon to end negative rates and although the government is keen on moves that could support the weak Yen, December is a politically difficult time and a January decision appears to be a more realistic scenario.

NZD/USD flat trades on either side of 0.5900 after dipping under yesterday’s 0.5889 low earlier in the session, with the current intraday range at 0.5886-5914. AUD/USD tested 0.6400 to the downside before finding some support at the level, but the pair remains subdued in a 0.6399-6433 parameter. USD/JPY found an overnight low near 147.00 to trade in a 147.03-44 band.

Substantial strength was seen in the Polish Zloty after the Polish PM's Adviser said the PLN has weakened beyond the optimal level for Poland and added the optimal level for EUR/PLN is between 4.40-4.60 range. The Adviser also highlighted that Poland has the tools to ensure the PLN is at an optimal level. Following the initial remark, EUR/PLN fell from 4.6650 to 4.6450 at which point it briefly stabilised before falling further to a 4.6348 trough. As a reminder, this follows the 75bp rate reduction (exp. 25bp) by the NBP last week, a move that has drawn criticism from opposition politicians heading into the October election cycle. Additionally, the 75bp move has been described as a significant surprise by some of those on the NBP board when it was first proposed.

13 Sep 2023 - 10:05- Research Sheet- Source: Newsquawk