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FX Update: Gauging the US CPI reaction potential.

Picture of John Hardy
John Hardy

Head of FX Strategy

Summary:  Tomorrow’s CPI number is the most significant US data release this week. A survey of the last four US CPI releases shows that there have been very few surprises of note in the data series, with last month’s March CPI report surprising slightly to the downside at the headline. With the market searching for catalysts here, any data surprise could trigger significant intraday volatility, and today’s article looks at the scale of market volatility to the last four releases across asset classes.

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Today's Global Market Quick Take: Europe from the Saxo Strategy Team

FX Trading focus: JPY cross focus through the US CPI release tomorrow. As we search for the next significant catalyst, we size up the magnitude of market volatility to the last four US CPI releases ahead of tomorrow’s April inflation numbers.

Bias notes today:

AUD and CAD: Consolidating recent pointed strength – watching 0.6800 as a trigger area for technical AUDUSD longs (likely requires more risk-on and commodities, especially metals, to wake up.) A soft US CPI tomorrow would be the most interesting test for USD bears.

JPY: It is time for the JPY to make a statement one way or another after the pump and dump reaction post-BoJ meeting. Looking to add a downside focus on EURJPY to negative USDJPY focus if EURJPY remains south of 150.00 – especially if yields fall post-US CPI.

Watching for downside follow through here after the pump and dump in many JPY crosses and the euro relative strength now possibly having exhausted itself as the market will find it difficult to market ECB expectation any higher, in relative terms at minimum, to global central bank peers. A soft US CPI release will help the bearish case if treasury yields fall post that release. Significant follow-through below 146.50 would suggest that we have rejected the entire attempt on the 15-year highs above the high water from last October near 148.40.

Source: Saxo Group

US CPI releases of last four months and market reactions.
The table below shows the expected and actual data from each of the last four US CPI releases for the December through March. It is always important to note that the market backdrop can be as deciding a factor as anything else. Take the February CPI release, which came out March 14, just days after the sudden collapse of Silicon Valley Bank and ensuing banking turmoil that it sparked. For FX traders, as general rule, any significant surprises in US data generally trigger stronger reactions in USDJPY than in other USD pairs if the data triggers significant volatility in US treasury yields. More comments on the last few releases and the Wednesday, May 10 release below the table.


The special context and market backdrop of this CPI release. Market energy is rather low here coming into this release, and EURUSD, for example, has been stuck in a tight range, having failed to stray more than 100 pips from the sticky 1.1000 level for nearly an entire month, while USDJPY has coiled around after the big pump-and-dump reaction to the Bank of Japan meeting on the Friday before last. The market feels comfortable with its expectations that the Fed will pause its tightening cycle from here, with a small minority even expressing the view that the Fed will be ready to cut at the July FOMC meeting and a 25 basis point cut almost fully priced for the September meeting and December priced over 70 basis points (-0.7%) below the current Fed Funds rate.

To see a significant volatility injection into this market, we’ll likely need to see a surprise in the core data, preferably the M/M expectations (0.3% in this case.). An upside surprise is USD positive, while a negative surprise should play USDJPY negative and generally JPY positive, particularly if long US treasury yields dip. Whether a soft release (presumably a -0.1% miss) proves more broadly USD negative will depend on whether risk sentiment posts an enthusiastic reaction. Given that the market has already priced the end of the Fed tightening cycle and the beginning of rate cuts just over four months from now, with significant further cuts in 2024 we almost need a soft print to justify market expectations. It is far more difficult to ponder the reaction function to a hot release, which the market may try to look through, but the knee-jerk would probably be for a spike in USDJPY higher, risk-off (particularly in Nasdaq 100) and for higher US 2-year yields. The key in all cases is to watch the treasury market for confirmation of anything – without a move that sticks outside of the recent range in 2-year and/or 10-year yields, this CPI release may just be that much more short term noise. And note the split reaction last month (read as positive for sentiment, but then the market closed negative, while FX was less affected by the change in temperature).

Table: FX Board of G10 and CNH trend evolution and strength
The most notable development over the last five days is the mark-down in the Euro relative to its former top-dog status together with CHF. Without more positive buzz surrounding the China re-opening story or at least follow through higher in global risk sentiment, the NZD out-performance is beginning to look a bit stretched.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
EURNOK uptrend set to end if the pair closes lower. Watching USD pair status over tomorrow’s CPI release and JPY status across the board.

Source: Bloomberg and Saxo Group

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