EUROPEAN FX UPDATE: GBP digests hot inflation metrics, USD eyes PPI

USD: DXY -0.1%; 98.50

• The dollar is giving back some of yesterday's gains seen in the aftermath of US CPI data. Whilst the core M/M metric printed below expectations, the post-release upside in the dollar was driven by concerns over signs that Trump's trade policies are beginning to add to price pressures in the US with core goods inflation at its highest level in nearly two years. Upcoming releases are expected to show an intensification of this trend. As such, odds of a September rate cut have slipped to the lowest level this year at just over 50%. Further inflation data is due today with Y/Y PPI expected to decline to 2.5% from 2.6%, M/M is expected to pick up to 0.2% from 0.1%. Once released, markets will be able to cement calls for the upcoming PCE report (the Fed's preferred inflation gauge). Today's Fed docket is a busy one with Barkin, Barr, Cook, Hammack, Logan, Kugler & Williams all due on deck. However, officials are likely to reiterate their wait-and-see approach. Note, the Fed Beige Book at 19:00BST will be parsed for the impact of Trump's tariff regime at a regional level. DXY sits towards the top end of yesterday's 97.97-98.69 range.

EUR: EUR/USD +0.2%; 1.1618

• EUR is attempting to atone for yesterday's losses, which saw EUR/USD slip onto a 1.15 handle for the first time since 25th June. In a week lacking in Eurozone data, the narrative for the EUR remains dictated by events on the trade front as the EU and US attempt to strike a deal ahead of the August 1st deadline after Trump threatened a 30% tariff rate on the EU over the weekend. French politics moved back into focus yesterday after PM Bayrou unveiled his plans to bolster France's finances. His outline was subsequently met with threats of no confidence from the hard left and far right. However, markets remain relatively nonplussed at this stage. Given PPI metrics due out of the US today, absent a material breakthrough/breakdown in EU-US trade talks, the USD leg of the pair will likely provide near-term direction for EUR/USD; sits towards the bottom end of yesterday's 1.1593-1.1692 range.

JPY: USD/JPY U/C; 148.85

• JPY flat vs. the USD after a recent run of losses, which have lifted USD/JPY from the low seen on July 1st @ 142.68 to a multi-month high today @ 149.18. The main drivers for the move have been a broad pick-up in the USD and angst over the lack of trade progress between Japan and the US. The uncertainty presented by the ongoing standoff has halted the BoJ's tightening plans with just 15bps of hikes priced by year-end. Additionally, the increase in back-end Japanese yields is also resonating with the FX market, with upside in the rates space driven by expectations that the ruling bloc could lose its majority at this weekend's upper house elections. Such an outcome is expected to lead to looser fiscal policy. The next upside level for USD/JPY comes via the 3rd April high @ 149.33.

GBP: GBP/USD +0.1%; 1.3399

• GBP has seen some mild support in the wake of hotter-than-expected UK inflation metrics. Y/Y CPI unexpectedly advanced to 3.6% from 3.4% (exp. 3.4%) and the services metric held steady at 4.7% vs. expectations of a decline to 4.6%. The release has further underscored the difficult policy mix for the BoE whereby sticky inflation is currently accompanied by weak growth, soft retail sales and a loosening labour market. On the latter, the latest jobs report hits tomorrow morning with focus on any further deterioration in the labour market; attention will also be on any upward revision to the HMRC payrolls change metric, which showed its largest contraction since May 2020. Accordingly, markets still expect the BoE to cut rates next month. However, today's CPI release has dampened calls for the MPC to speed up the pace of rate cuts from its current quarterly cadence. Whilst Cable did briefly make its way back onto a 1.34 handle with a session high @ 1.34, the upside was limited by the aforementioned stagflationary outlook facing the UK.

Antipodeans: AUD/USD +0.2%; 0.6523. NZD/USD -0.1%; 0.5942

• Slightly mixed vs. the USD with no obvious driver for the mild discrepancy. Newsflow surrounding both currencies remains light as markets await tomorrow's Australian jobs report. Ahead of which, it is worth noting that markets price a 78% chance of an RBA cut next month and see a total of 54bps of loosening by year-end. Jobs data aside, the near-term direction for AUD/USD and NZD/USD will likely be driven by USD and the broader risk environment. AUD/USD currently sits towards the bottom end of yesterday's 0.6507-57 range. NZD/USD is just about holding above yesterday's 0.5938 low.

16 Jul 2025 - 10:00- ForexData- Source: Newsquawk