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

USD: DXY -0.1%; 98.36

• After two sessions of solid gains for DXY, the rally has paused for breath. Whilst the price action on Wednesday left many desks scratching their heads, yesterday's upside was clearly driven by US data; Q2 GDP, weekly claims and durables. ING adds that the surge in the USD has likely also been assisted by positioning. However, ING notes that it thinks "more good news is needed to keep the dollar going, and we see substantial risks of a correction today after a USD rally that looks slightly overdone according to our model". The next potential inflection point for the USD comes via today's PCE data with Y/Y core PCE expected to hold steady at 2.9% (a view backed by Powell earlier this week) and the M/M rate seen declining to 0.2% from 0.3%. Whilst the PCE series is the Fed's preferred inflation gauge, with CPI and PPI already in hand and the increasing focus on the labour market, next week's NFP print likely carries greater weight for the USD. Tariff headlines have re-emerged over the past 24 hours with focus on pharma, furniture and several other sectors. However, the vague language around the pharma actions has seen equity indices take the news in their stride. DXY has ventured as high as 98.53 but has been unable to test yesterday's best @ 98.60.

EUR: EUR/USD +0.1%; 1.1678

• EUR is a touch firmer vs. the USD after a couple of bruising sessions, which have seen the pair pull back from a 1.1820 peak on Wednesday to a 1.1645 low yesterday. Price action has largely been driven by the USD rather than anything EUR-specific. Rabobank notes that despite this year’s uptrend in EUR/USD, it has spent very little time above the 1.1800 area. This raises the question of whether the momentum in EUR/USD is waning". Rabobank expects the pair to reach 1.20 in Q2 2026, which is later than the consensus view of Q1 2026. This morning's ECB SCE saw little follow-through into EUR, with the report seeing a 20bps pick-up in the 1yr inflation forecast to 2.8% and the 5yr projection rise to 2.2% from 2.1%. ECB speak continues to add very little, with Italy's Cipollone noting that the Bank stands ready to act, if needed. President Lagarde is due to give remarks at 10:30BST. Next week sees the release of flash EZ CPI metrics. Consensus looks for a rise in the headline Y/Y metric to 2.3% from 2.0%. EUR/USD remains below its 50DMA @ 1.1679 but above yesterday's 1.1645 trough.

JPY: USD/JPY U/C; 149.72

• JPY is flat vs. the USD after a recent run of losses, which have seen USD/JPY rise from a 147.51 base on Wednesday to a current session peak @ 149.95, taking out its 50 and 200DMAs in the process. Price action for the pair has largely been dictated by interest rate differentials as a combination of cautious Fed speak and strong US data has supported US yields. From the Japanese side of the equation, soft Tokyo inflation metrics overnight have also added to the trend, with the pair now eyeing a potential test of 150 to the upside. If breached, there is clean air until the August peak @ 150.91. As it stands, markets price a 57% chance of a 25bps rate hike next month. Expectations for the meeting will likely be cemented by a combination of the October 1st Tankan survey and the outcome of the LDP leadership election on October 4th.

GBP: GBP/USD +0.2%; 1.3367

• GBP is attempting to atone for recent losses vs. the USD, which have seen Cable slip from a WTD peak on Tuesday @ 1.3537 to a MTD low yesterday @ 1.3323. This week has been a quiet one from a UK perspective, aside from a disappointing flash PMI report on Tuesday, which was hampered by ongoing angst surrounding the upcoming UK budget on November 26th. Next week's UK data calendar is a quiet one, with the next two crucial releases not coming until October 14th and October 22nd; the labour market and CPI reports. The latter is expected to see inflation hit the 4% mark. As such, traders remain tentative in pricing additional easing by the BoE with just 6bps of loosening seen by year-end.

Antipodeans: AUD/USD -0.1%; 0.6535. NZD/USD U/C; 0.5766

• Antipodeans are broadly steady vs. the USD with both pairs pausing after the prior day’s heavy selling. Newsflow and data were light during APAC hours, though a pullback in copper kept AUD capped. AUD/USD is currently sandwiched between yesterday's multi-week low @ 0.6526 and its 50DMA @ 0.6539. NZD/USD hit a fresh MTD trough overnight @ 0.5757 with the next downside target coming via the 11th April trough @ 0.5737.

26 Sep 2025 - 10:05- ForexData- Source: Newsquawk