EUROPEAN FX UPDATE: FX markets calm ahead of US CPI and ECB policy announcement

USD: DXY +0.1%; 97.91

• DXY is fractionally higher following an indecisive session yesterday in the wake of soft PPI metrics and in the run-up to today's CPI report. Expectations are for core M/M CPI to remain at 0.3% with the Y/Y rate seen holding steady at 3.1%. Ahead of the release, ING highlights yesterday's 1.7% decline in “trade services”– a proxy for corporate profit margins. ING writes that this is indicative of firms "absorbing higher input costs linked to tariffs rather than passing them on to consumers". As such, the desk notes that the report "reinforces confidence that the upcoming CPI print is unlikely to exceed 0.3% M/M". From a Fed perspective, a 25bps cut is fully priced for next week with a circa 7% probability of a larger 50bps move. A 50bps reduction remains improbable even in the event of a soft print today, as markets are unlikely to declare the all-clear on tariff-related upside inflation risks at this stage. However, markets may instead opt to ramp up dovish bets by year-end, which currently suggests just under 70bps of loosening. Elsewhere on the data slate are the weekly jobs figures with initial claims expected to slip to 235k from 23k. DXY has ventured as high as 97.96 with attention on a test of 98.00; not breached since 5th September.

EUR: EUR/USD U/C; 1.1690

• EUR is steady vs. the USD ahead of the latest ECB policy decision, which is widely expected to see policymakers stand pat on the Deposit Rate at 2%. These expectations come off the back of the EU-US trade agreement, resilient growth in the face of trade tensions and a modest uptick in inflation. Moving forward, there is clearly a split of views on the Governing Council, with the doves on the board, such as Finland’s Rehn, flagging the likelihood of greater downside risks to inflation. However, the hawks on the GC, such as Germany’s Schnabel, are of the view that rates are already mildly accommodative, and do not see a reason for a further rate cut, adding that global rate hikes may come earlier than people think. Market pricing sees a roughly 50% chance of a rate cut by March next year. President Lagarde will likely be asked about any potential backstops for French debt following the (as expected) fall of PM Bayrou. The Transmission Protection Instrument (TPI) is the main tool at the ECB’s disposal. However, deployment is not something the ECB is likely to be actively considering at this stage. EUR/USD has slipped back onto a 1.16 handle but is holding above yesterday's low @ 1.1683.

JPY: USD/JPY +0.2%;

• JPY sits at the bottom of the G10 leaderboard and has extended its mild losses vs. the USD seen yesterday. From a macro perspective, today's session has been lacking in Japanese-specific updates, but traders remain mindful of political risk and its potential impact on the BoJ. On which, various source reports yesterday were suggestive of the BoJ remaining of the view that it remains in a tightening cycle. However, the next step may be delayed on account of PM Ishiba's decision to step down as head of the LDP. As it stands, markets price a circa 60% chance of a move by year-end. USD/JPY has ventured as high as 147.83 with focus on a test of 148 to the upside; not breached since 8th September (148.57 was the peak that day).

GBP: GBP/USD -0.1%; 1.3514

• GBP is a touch softer vs. the USD as incremental macro drivers for the UK remain on the light side. Concerns over longer-term UK borrowing costs have temporarily abated with the 30yr yield having pulled back to circa 5.48% from its recent multi-decade high @ 5.752% printed on 3rd September. Tomorrow's docket sees the release of monthly UK GDP metrics, whereby a soft outturn could see fiscal concerns reassert themselves on the market narrative. However, any bets surrounding the BoE will likely be tempered by next week's busy domestic docket, which includes inflation, labour market and retail sales reports. As it stands, markets price around 10bps of loosening by year-end. GBP/USD is currently holding above the 1.35 mark after basing out @ 1.3504.

Antipodeans: AUD/USD -0.1%; 0.6610. NZD/USD -0.2%; 0.5928

• Both marginally softer vs. the USD with not much in the way of incremental newsflow for the antipodes. In a recent report, Rabobank stated for AUD/USD that "while we continue to forecast a moderate uptrend in the currency pair into next year, we see scope for short covering in favour of the USD on a 1 to 3 month view. We see scope for a move back to the 0.65 area in this timeframe before AUD/USD moves to 0.68/69 on a 12-month view". In today's session, AUD/USD is just about holding above the 0.60 mark, whilst NZD/USD remains within yesterday's 0.5921-64 range.

11 Sep 2025 - 09:55- ForexData- Source: Newsquawk