EUROPEAN FX UPDATE: USD sell-off pauses for breath ahead of PPI, Yen rises on Bessent BoJ comments

USD: DXY +0.2%; 97.91

• After two sessions of losses, which have been driven by markets ramping up bets on Fed rate cuts, the DXY is attempting to bounce off its recent lows. There isn't an obvious reason for the upside and as such, it may be more technical in nature. Many desks are still biased towards a softer dollar, given that many of the candidates in the running for the Fed Chair role are tripping over themselves to out-dove each other to secure the top job. In the interim, price data will reassert itself today on the macro narrative with PPI metrics due on deck, which will help formulate expectations for the PCE release later in the month. That being said, next week's Jackson Hole appearance by Fed Chair Powell and the August labour market report will likely prove to be more decisive for the next leg in the USD move. Geopolitical headlines will pick up pace over the next 48 hours with Trump set to meet Putin, however, the outcome is unlikely to have a durable impact on the greenback. DXY has recovered to 97.92 but still shy of yesterday's best @ 98.13.

EUR: EUR/USD -0.2%; 1.1683

• EUR is a touch softer vs. the broadly firmer USD with EUR/USD slipping back onto a 1.16 handle after topping out yesterday @ 1.1730; highest since late July. As we have mentioned in our commentary throughout the week, macro drivers for the Eurozone have been on the light side with the next inflection point for ECB pricing unlikely to arrive until traders get a clearer picture on how the recent EU-US trade agreement has filtered into the Eurozone data mix. Should the Eurozone retain its resilience seen thus far, the narrative may shift to 2026 rate hike bets. However, we still have a long way to go until that becomes clearer. As it stands, markets price a near 50:50 chance of a rate cut by year-end. EUR/USD has delved as low as 1.1674 and is currently holding above yesterday's trough @ 1.1669.

JPY: USD/JPY -0.6%; 146.45

• JPY is the clear outlier across the majors with the Yen firmly at the top of the leaderboard. The outperformance is being pinned on yesterday's comments by US Treasury Secretary Bessent who remarked that the BoJ is behind the curve on inflation and is likely to hike interest rates soon. This allied with the increased pace of rate cut bets in the US has brought interest rate differentials between the US and Japan into greater focus and dragged USD/JPY to a fresh low for the month @ 146.22, briefly slipping below its 200DMA @ 146.40. Markets price 15bps of tightening from the BoJ by year-end.

GBP: GBP/USD U/C; 1.3579

• GBP is proving to be more resilient than most peers (ex-JPY) with the pound benefitting from a better-than-expected outturn for UK GDP. M/M growth for June rose to 0.4% from -0.1% (Exp. 0.1%), leaving the Q/Q Q2 print at 0.3% vs. prev. 0.7% (Exp. 0.1%). The upside was driven in large part by government consumption, as opined by ING and therefore may be deemed by some as not showing "high quality" growth. Nonetheless, the release takes place in the context of a "not as bad as feared" outcome for labour market data on Tuesday and the hawkish BoE rate cut last week. Looking ahead, Pantheon Macroeconomics is of the view that GDP will continue to rise steadily, and retain its call of Q/Q growth of 0.2% in Q3, fractionally below the MPC’s projection of a 0.3% gain. Markets continue to scale back BoE easing bets with 9bps of loosening priced for November vs circa 11bps yesterday. Cable has advanced further on a 1.35 handle with a current session high @ 1.3591 and focus on a test of 1.36; not breached since 10th July.

Antipodeans: AUD/USD -0.1%; 0.6533. NZD/USD -0.4%; 0.5954

• After two sessions of gains vs. the USD, both of the antipodes are softer vs. the broadly firmer dollar. A choppy reaction was seen for AUD after the latest Australian jobs data showed Employment Change slightly missed forecasts but was solely fuelled by an increase in full-time work and the Unemployment Rate fell to 4.2% from 4.3%, as expected. AUD/USD has maintained its position on a 0.65 handle and trades within a 0.6530-68 range. NZD/USD is currently contained within yesterday's 0.5944-96 trading band.

NOK: EUR/NOK -0.3%; 11.8895

• As expected, the Norges Bank stood pat on policy given the recent rebound in underlying inflation and depreciation of the NOK. Given it was not an MPR meeting, we didn't get much in the way of quantitative details from the Norges Bank over how it sees the rate path in the coming years. However, from a qualitative perspective, the Bank judges that policy is still restrictive and will need to be normalised. That being said, policymakers are wary of lowering the rate "too quickly" and acknowledge that a higher policy rate than envisaged in June may be required in the event that wage and price inflation will remain elevated for longer than projected. This elicited a marginally hawkish reaction in NOK with EUR/NOK now lower on the session but holding above yesterday's trough @ 11.8879. Markets price circa 43bps of loosening by year-end, which would imply one full 25bps reduction and a 72% chance of another.

14 Aug 2025 - 10:05- ForexData- Source: Newsquawk