EUROPEAN FX UPDATE: USD is attempting to atone for yesterday's claims-induced losses

USD: DXY +0.2% 97.71

• DXY is attempting to claw back some lost ground after declining yesterday in the wake of the jump in US weekly claims data, which overshadowed the mostly in-line/slightly firmer (on an underlying basis) CPI report. Pricing for next week's FOMC rate decision was largely unchanged with markets reluctant to price a 50bps reduction. However, markets temporarily fully priced 3 x 25bps reductions by year-end in a move that coincided with the 10yr yield slipping below 4%. Looking ahead to next week's meeting, beyond the rate decision itself, focus will be on the accompanying projections. On which, Morgan Stanley expects the dot plot to maintain expectations of 2 x 25bps reductions in 2025 with the 2026 dot to show 2 x 25bps cuts vs. the current forecast of just one. With regards to personnel at the Fed, the latest reporting suggests US Treasury Secretary Bessent met this week with Warsh, Lindsey, and Bullard as the search for the next Fed chair continues. For today's docket, the lone highlight is flash UoM data for September with the headline sentiment metric expected to slip from 58.0 from 58.2. DXY sits towards the bottom end of yesterday's 97.47-98.08 range.

EUR: EUR/USD -0.1%; 1.1720

• EUR is steady vs. the USD after gaining yesterday in the wake of a broadly softer dollar and what turned out to be a hawkish ECB policy announcement. The main takeaway from the meeting was that the Governing Council feels comfortable that the disinflationary process is over, risks to the growth outlook are now more balanced and a temporary undershoot of inflation (with reference to the 2026 projection of 1.7%) would not be enough to justify further action. Accordingly, many desks have now scrapped expectations of the ECB cutting rates this year. Source reporting has suggested that an October cut is very unlikely. However, the matter could be revisited in December alongside the latest economic projections. We have heard from a slew of ECB speakers this morning, who have largely echoed Lagarde's remarks that policy is in the right place. Afterhours, focus will be on Fitch's review of France. ING writes that a "downgrade would probably not change the broader picture for French bond markets since a 10y spread of 79bp over Bunds, nearly on par with Italy, already reflects expectations of rating downgrades over the medium term". EUR/USD ventured as high as 1.1747 before pulling back. If upside resumes, the WTD peak sits @ 1.1780.

JPY: USD/JPY +0.4%; 147.85

• JPY is softer vs. the USD and at the bottom of the G10 leaderboard. Focus this week for Japan has primarily been on the fallout from political uncertainty after PM Ishiba announced his resignation. The inference for markets has been that the upheaval in Japan could derail BoJ tightening expectations. Source reporting since has suggested that the BoJ remains in a hiking cycle. However, the next move has likely been delayed. As such, next week's BoJ confab is likely to be a non-event when it comes to the rate decision itself with greater focus on signalling for additional tightening. As it stands, markets price around a 62% chance of a 25bps hike by year-end. Elsewhere, a joint statement between the US and Japan has reaffirmed their commitment to close consultations on foreign exchange matters and reaffirmed that exchange rates should be market-determined. USD/JPY is currently contained within yesterday's 146.98-148.19 range.

GBP: GBP/USD -0.3%; 1.3532

• GBP is on the backfoot vs. the USD following an in-line M/M outturn for UK GDP at 0%, leaving the 3M/3M rate at 0.2%, as expected. Looking under the hood, Pantheon Macroeconomics noted that M/M growth was close to being rounded down to 0.1% with the main downside surprise coming via a 1.3% M/M decline in manufacturing production. Looking ahead, Pantheon expects "GDP growth will probably undershoot the MPC’s forecast for Q3 slightly after today’s release, but that should have little effect on interest rates". Accordingly, market pricing has been left little changed with perhaps greater focus on next week's docket, which includes UK jobs, CPI retail sales and the BoE rate decision. The latter is widely expected to see rates left unchanged with the next cut not fully priced until April next year. Cable sits towards the middle of yesterday's 1.3490-1.3583 range.

Antipodeans: AUD/USD -0.1%; 0.6651. NZD/USD -0.3%; 0.5957

• Both softer vs. the USD after faltering alongside the pullback in risk sentiment in early European trade. Macro drivers for both remain on the light side and as such, the risk environment and broader moves in the USD are likely to provide the greatest source of traction for AUD/USD and NZD/USD. AUD/USD briefly hit a fresh YTD high @ 0.6668 before pulling back below yesterday's peak @ 0.6665. NZD/USD is contained within yesterday's 0.5914-79 range.

12 Sep 2025 - 10:00- ForexData- Source: Newsquawk