EUROPEAN FX UPDATE: GBP and JPY selling helps support DXY ahead of US data

USD: DXY +0.6%; 98.26

• DXY is very much on the front foot following yesterday's market holiday with the dollar showing the greatest gains vs. JPY and GBP. In terms of fresh fundamental drivers from the US, there hasn't been much fallout from the US appeals court ruling that most tariffs issued by US President Donald Trump are illegal. US Treasury Secretary Bessent has since noted that other statutes could be used to justify tariffs, but they are not as efficient and not as powerful. Market focus this week is set to be dominated by the data slate with today's highlight coming via ISM Manufacturing PMI metrics. Other releases this week include JOLTS tomorrow, ADP & ISM Services Thursday and the all-important payrolls report on Friday. A September 25bps Fed rate cut is priced at around 89% and it would take a particularly strong NFP and/or CPI release to derail such expectations. Instead, hot reports would likely be used to trim year-end easing expectations with around 54bps of loosening seen by year-end. Such pricing is also dependent on personnel changes at the Fed. DXY has made its way back above the 98 mark (coincides with the 50DMA). Current session high @ 98.32. Next target comes via the 27th August peak @ 98.73.

EUR: EUR/USD -0.5%; 1.1645

• In-fitting with the performance seen in peers, EUR is on the backfoot vs. the USD. Albeit with some support provided by cross-related flows into EUR/GBP. Today's Eurozone inflation data showed an unexpected uptick in inflation to 2.1% from 2.0%, super-core held steady at 2.3% (Exp. 2.2%) and services ticked low to 3.1% from 3.2%. The data is non-incremental for the near-term policy outlook with an unchanged rate next week priced at 99%. However, the debate on the ECB over what comes next for the Bank at the end of the year and heading into 2026 is clearly heating up with ECB's Rehn over the weekend flagging the downside risks to Eurozone inflation stemming from the firmer EUR, cheaper energy, trade policies and declining core inflation. Simkus has also been on the wires this morning, hinting at a December reduction. In contrast, Schnabel is of the view that rates are already mildly accommodative, does not see a reason for a further rate cut and global rate hikes may come earlier than people think. EUR/USD has reverted back onto a 1.16 handle and slipped below its 50DMA @ 1.1660. Current session low sits @ 1.1634 with focus on a potential test of 1.16.

JPY: USD/JPY +0.9%; 148.46

• JPY sits near the foot of the majors following a combination of BoJ rhetoric and political instability. On the former, remarks from Deputy Governor Himino appeared at first glance hawkish with the central banker noting that despite the three policy interest rate hikes by the central bank thus far, real interest rates have remained at significantly low levels as inflation has stayed strong. He subsequently reiterated it is appropriate to continue raising interest rates in accordance with improvements in the economy. However, desks have since highlighted the lack of commitment in his remarks with Himino caveating his comments with the uncertainty regarding the global economy and trade - something which will likely temper expectations of near-term tightening. On the political front, reports suggest that following the party's poor electoral performance, LDP sec gen Moriyama and policy chief Onodera will resign from their positions. USD/JPY has ripped through the 148 mark and is approaching its 200DMA @ 148.85 with a current session peak @ 148.78.

GBP: GBP/USD -1%; 1.3410

• GBP is getting hit pretty hard this morning with ongoing focus on the UK's desperate fiscal outlook. This has been reflected in fixed income markets with the UK 30yr yield hitting its highest level since 1998. In terms of what has changed since the start of the week, focus has been on PM Starmer's decision to bring in several economic advisers to oversee the Autumn budget. The changes have been framed by the PM as a move to help improve economic growth. However, as the budget comes into view, markets are becoming increasingly concerned over the prospect of higher taxation and other market-unfriendly policies given the lack of scope to cut spending further. The timing of the budget is yet to be confirmed. However, an announcement is expected within the coming days given that the OBR requires ten weeks notice to produce its forecasts. At this stage though, it is tough to see how Chancellor Reeves can simultaneously, fill her current fiscal hole, appease markets and stick to her fiscal rules. Tweaking the latter in theory could be an option, but could end up being met with resistance by the bond market. Cable has crashed through the 1.35 mark and briefly made its way onto a 1.33 handle with a session low @ 1.3376.

Antipodeans: AUD/USD -0.6%; 0.6508. NZD/USD -0.8%; 0.5855

• Both are softer vs. the dollar alongside the soft risk tone and broadly stronger USD. Overnight, little reaction was seen following the marginally better-than-expected Current Account Data and Net Exports Contribution to GDP from Australia. AUD/USD is just about managing to hold above the 0.65 mark, having slipped below its 200DMA @ 0.6519. If 0.65 gives way, there is clean air until the 27th August low @ 0.6462. NZD/USD has delved as low as 0.5850 with the next downside target coming via the 200DMA @ 0.5833.

02 Sep 2025 - 10:20- ForexData- Source: Newsquawk