EUROPEAN FX UPDATE: Ongoing USD rally pauses for breath ahead of PCE

USD: DXY -0.1%; 99.73

• The recent rally in USD has paused for breath after DXY stalled ahead of the 100 mark post-FOMC. To recap, the Fed held rates at 4.25-4.50%, as expected, with Governors Waller and Bowman dissenting in favour of a 25bps cut. In Powell's presser, he said no decision has been made about the September meeting, and they will not let tariffs become inflationary, because they will make sure it does not become serious by deploying their tools. In the wake of these comments, particularly the latter, the Dollar rose to peaks, and Fed money market pricing became more hawkish, with only 38bps of cuts seen by year-end now vs 46bps post Fed statement. For today's agenda, monthly PCE metrics for June will take centre stage with core M/M PCE expected to pick up to 0.3% from 0.2%. Note, desks expect that inflation is poised for further firming in the coming months. Elsewhere, labour market data in the form of weekly claims and Challenger layoffs are due ahead of tomorrow's crucial NFP print. On the trade front, Politico reports Trump could impose higher tariffs on nations that have been unable to reach a deal with the US; could include Canada, Mexico and Taiwan. If the upside in DXY resumes and takes out the 100 mark, the next target will come via the 29th May peak @ 100.54.

EUR: EUR/USD +0.4%; 1.1441

• EUR/USD is attempting to atone for recent losses, which have been driven by a combination of the fallout from the EU-US trade deal and yesterday's FOMC policy announcement. For the Eurozone, regional CPI metrics have continued to drip feed into the market ahead of the bloc-wide release tomorrow. Metrics from France printed 10bps firmer-than-expected Y/Y on a headline basis but 10bps weaker for the normalised print. Regional CPIs from Germany have seen an uptick on a M/M basis from the prior and mixed Y/Y ahead of the mainland metrics at 13:00BST. In the near term, the USD may provide the greater source of direction for the pair, particularly as tomorrow's payroll print looms large. The Fed has also exerted a mechanical impact on ECB pricing with a less than 50% chance of another 25bps rate cut seen by year-end. EUR/USD has found support just above the 1.14 mark. If the level gives way, the June 10th low sits @ 1.1373.

JPY: USD/JPY +0.1%; 149.60

• JPY is softer vs. the USD in the wake of the latest BoJ policy announcement. The BoJ maintained its short-term interest rate target at 0.5%, as expected with the decision made by unanimous vote. The policy statement was one of caution given the uncertainties provided by the trade war and as such, there was little reaction to the release. Elsewhere, the Bank raised its core CPI forecasts through 2027 and upgraded its near-term growth outlook. During the follow-up press conference, JPY upside vs. the USD was pared and USD/JPY made its way back onto a 149 handle after Ueda refrained from any hawkish overtures, whilst emphasising that in the near-term, growth is expected to slow and inflation is set to stall. He also noted that the current FX rate is not diverging far from BoJ assumptions. Overall, BoJ pricing was little changed with 17bps of hikes priced by year-end. USD/JPY ventured as high as 149.72. If 150 gives way, that will open up a potential move towards the pre-Liberation Day high @ 150.54.

GBP: GBP/USD +0.1%; 1.3250

• GBP is slightly firmer vs. the USD with Cable almost entirely at the whim of the USD given how barren the UK docket has been this week. That is set to remain the case until next week's BoE policy announcement, which is 82% priced for a 25bps reduction. Within the vote split, Morgan Stanley expects a 1:7:1 outcome with Mann voting for a hold and Dhingra voting for a 50bp cut. Additionally, the desk expects unchanged messaging, and an uplift to near-term inflation forecasts. Cable remains stuck on a 1.32 handle after delving as low as 1.3228 yesterday.

Antipodeans: AUD/USD +0.4%; 0.6455. NZD/USD +0.3%; 0.5911

• Both sit towards the top end of the G10 leaderboard following the current upbeat risk sentiment. For AUD, upside has been restricted as better-than-expected Building Approvals and Retail Sales data for Australia were offset by disappointing official Chinese PMI data. AUD/USD remains on a 0.64 handle after hitting a MTD low yesterday @ 0.6426. NZD/USD has made its way back onto a 0.59 handle after hitting a MTD trough yesterday @ 0.5888.

31 Jul 2025 - 10:00- ForexEU Research- Source: Newsquawk