EUROPEAN FX UPDATE: G10s softer to varying degrees as DXY reigns in early trade

Analysis details (09:33)

DXY

• The Dollar index has kicked off the week on a firmer footing as bonds eased off Friday’s highs and risk gradually soured overnight and into early European hours. The index kicked off trade from a base of 103.12 (vs Friday’s 103.11 low) and briefly topped the 103.50 mark to a 103.52 intraday peak at the time of writing, looking ahead to the 200 DMA at 103.56 as the next level ahead of Friday 103.73 high.


• Desks cite Friday’s mild gains to losses in counterparts, namely the EUR on the back of dovish ECB speak, coupled with comments from Fed Chair Powell who left the door open for further rate hikes, although markets do not believe this will materialise. The Fed is now in its Blackout period ahead of the December 12-13th confab, thus there will be no pertinent Fed interviews this week on the economy and current/future policy.


• As such, the focus this week will likely be on the slew of data, which finishes off with Friday's NFP. Today will see Durable Goods Orders, tomorrow sees the US services ISM and the JOLTS job opening data, Wednesday then sees the ADP jobs data ahead of Thursday's initial claims, and November’s NFP report on Friday - expectations for modest growth, steady unemployment and earnings – “Given a propensity for investors to put money to work outside of the dollar, we think a consensus outcome would be a mild dollar negative. We think it would really have to be a strong number to put the idea of another Fed rate hike back on the table”, says ING, as they forecast DXY trading in a 103-104 range during the week.

EUR, GBP

• The Single Currency is slightly more cushioned vs G10 peers (ex-USD) following last week’s decline on dovish ECB commentary coupled with the softer-than-forecast regional CPI data across the bloc. Last week saw EUR/USD slip from a 1.1017 peak towards a 1.0827 trough – finding support close to its 200 DMA on Friday which today stands at 1.0818. The pair is back above 1.0850 at the time of writing, within Friday’s 1.0827-0912 parameter after finding support near the 21 DMA (1.0846) at 1.0850. Money markets price the first full ECB cut by April 2024. The week ahead sees Tier 2 EZ data including Retail Sales, and Final Q3 GDP revisions, while speakers feature the likes of President Lagarde later today. “1.0825 now looks good intra-day support for EUR/USD. We suspect that it would have to take a very strong payrolls report to see EUR/USD trade 1.0700 again. But then the euro can remain soft on the crosses for the time being”, says ING. Meanwhile, OpEx include several chunky near-the-money clips at 1.0820-35 (EUR 1.94bln), 1.0860-65 (EUR 2.15bln).


• Sterling is softer intraday and has dipped back under 1.2700 vs the USD, dipping from a 1.2724 peak towards a low of 1.2658 with traders looking at the ECB/BoE spread as expectations build of a deeper easing cycle in the EZ vs the UK. Analysts cite 0.8500 in EUR/GBP as a level to watch for a rebound. Looking ahead, the UK calendar is sparse this week, with traders eyeing flows via the EUR/GBP cross should the ECB push back against the dovish market pricing.

JPY, CHF

• The Japanese Yen is now flat intraday following the notable rise on Friday on the back of narrowing rate differentials – dipping from a 148.34 high towards a 146.65 low against the Dollar. Overnight, the pair consolidated and met some resistance just under its 100 DMA (147.23) at 147.13, with traders keeping an eye on the yield dynamic with the US. BoJ commentary meanwhile did little to influence the pair overnight, with BoJ’s Noguchi stating that Japan has yet to achieve a wage-driven rise in inflation and said they must see price rises backed by sustained wage increases to achieve the 2% price target, according to Reuters. JPY pairs are mostly holding mild downward biases with EUR/JPY finding resistance at its 50 DMA (159.81) while GBP/JPY met a barrier near its 21 DMA (186.51). Meanwhile, AUD/JPY showed resilience amid expectations of a hawkish Reserve Bank of Australia tomorrow, although later slipped given the broader risk tone to levels under 97.50 from a 97.92 peak. Notable near-the-money OpEx for USD/JPY include 147.00-05 (USD 1.35bln), 147.75 (USD 871mln), 148.00 (USD 2.13bln),


• The Swissy is the G10 laggard this morning following the region's CPI metrics which printed sub-forecast across the board in the release before the SNB’s quarterly decision later this month. Within this, the rental price index increased by 1.1% in November 2023 compared with the previous quarter, reaching 105.3 points. The release sparked immediate weakness in the CHF, sending EUR/CHF higher to 0.9494 in the immediacy from 0.9456 pre-release. After the dust settled, market pricing saw a dovish move with a ~40% chance of a cut occurring at the December gathering implied vs 20% pre-release. Note - this is the first inflation release encapsulating the mid-2023 rental reference rate increase. In relation to this, on November 1st, Chairman Jordan said domestic inflation is likely to increase in the coming months due to increased rent and energy prices, while Schlegel on the 10th said a “temporary” increase in inflation due to rent is possible.

AUD, CAD, NZD

• All are hit by the broader risk mood, with the AUD and CAD narrowly lagging amid their commodity links. AUD is weighed on by the slide in copper, and iron, whilst the waning of gold prices also removed the cushion seen at the start of trade, with AUD/USD now back under 0.6650. CAD is pressured by the resumption of the crude prices slide as USD/CAD topped its 200 DMA (1.3516) once again and aims for the 100 DMA (1.3565). NZD/USD is marginally more cushioned as the AUD/NZD cross remains under 1.0750.


• Ahead, the RBA is expected to keep rates unchanged at its meeting on Tuesday with money markets pricing in a 95% probability for the Cash Rate Target to remain at 4.35% and just a 5% chance for a 25bps hike to 4.60%, while a Reuters poll showed 28 of 30 economists expect the central bank to keep maintain the cash rate at the current level and 2 economists are calling for a 25bps hike.

04 Dec 2023 - 09:33- Research Sheet- Source: Newsquawk