Yen bulls trampled. Trump-Putin talk on Ukraine buffets Euro.

US inflation and prospect of Trump-Putin talk on Ukraine shaking the market.
A head-spinning day for FX traders yesterday, as the JPY cross rally turned downright face-ripping on hotter than expected US core inflation data and then later on US President Trump announcing that he had spoken to Russia’s Putin on moving to end the war in Ukraine. The latter also boosted the euro more than most other currencies as I discuss below.

The US inflation data sent US long yields sharply higher – the US 10-year benchmark traded up about 10 basis points and as high as 4.65% yesterday as the ex Food and Energy number surprised by 0.1% (actually only 0.054% unrounded) and by 0.2% for year-on-year (actually by 0.152% unrounded). USDJPY backed up in sympathy with the move in US yields and erased the entirety of the recent downside break. It’s clear that the JPY remains slave to US yields, so we have to understand where yields are headed to know what USDJPY will do next. For that we need more time.

In short: we need several more months of data to understand where US inflation is heading – this latest data point was likely partially misleading due to seasonal and idiosyncratic factors, but the market was very poorly positioned for it, hence the exaggerated reaction. I’m not convinced that we see further follow-through on US yields here, but if we do, this will quickly dominate the market focus, likely sending the USD higher and delaying the prospects for any USD bear case, especially in USDJPY. 4.70-4.75% is critical for the technical outlook for US yield and any threat back toward 5.00% would likely crater risk appetite across all asset classes. For USDJPY, the bears are disheartened for the moment, but structurally, the USDJPY bear case remains intact if retracements can remain below 156.00. In the JPY crosses, the reversal looks overdone relative to the moves in global yields – a blowout of recent short positions, in all likelihood. Let’s see whether the move sticks.

By the way: John Authers points out in his column today that US inflation breakevens have come totally unmoored for the 2-year horizon on the fear of a jump in the CPI due to tariffs, while the 10-year remains mostly anchored even if edging to new highs, while the 5-year remains somewhat stolidly anchored. He also points out that other key measures of core inflation continue to drop, even if they remain at too-high levels for the Fed to ease.

And remember: the attention will quickly be elsewhere – especially on Trump’s retaliatory or “reciprocal" tariffs that he threatened just hours ago to announce as soon as today.

Roller coaster for the euro on prospects for peace in Ukraine.
The euro is clearly trying to absorb the implications of the US position on a post-Ukraine war environment if it gets its way as it rallied sharply on the news yesterday. There are a couple of angles on this that are euro-positive. The first is the vague general lift in Europe as an end to the war removes uncertainty, but also possible more profound relief from lower energy prices, if Russian energy is seen flowing more freely westward down the road. The other angle is fiscal and more durable. Trump has made it clear that he would like to see Europe largely fending for itself with a rebuilt military to protect its own borders and backing up Ukraine’s military credibility. Paying for the rebuilding of Ukraine’s economy would also largely fall to the Eurozone. Bloomberg’s The Big Take today puts the price tag of the defense implications along of building a credible EU defense deterrent and protecting Ukraine in the neighborhood of USD 3 trillion. Anything in that direction means plenty of fiscal issuance and a much hotter EU economy, with the possibility of large-scale Eurozone-issued sovereign debt to pay for it – all euro-positive. Far too early to tell whether or how quickly we move in this direction.

The first step is getting to the other side of the German election to see if the CDU’s Merz, the inevitable next Chancellor, can build a coalition of the willing to push debt-brake concerns aside in move toward more easy fiscal stance (highest odds are on yet another “grand coalition” with the SPD, but my German colleague prefers the slightly less likely coalition with the Greens, but both are relatively euro positive if the coalition is strong enough to avoid blocking from the other parties.) As well – what role can the EU play in shaping the terms of the deal and its aftermath?

Watching EURCHF and EURSEK as isolated measures of how the market reads the odds of a large EU fiscal expansion. EURCHF pumped to the key  0.9500+ resistance on the news but has retreated sharply today – that is the very well defined trigger area there.

Chart: AUDUSD
The RBA meets next Tuesday and the market is pricing strong odds for a rate cut on a recent faster than expected drop of inflation, but other economic data, especially the tight labor market, weigh against the RBA moving here. Meanwhile, we have the entire US-China trade relationship concerns weighing on Aussie. It’s a tough call, but the chart lines are clear: a solid zone of resistance between 0.6300 and 0.6330 that would likely be tested on an RBA pass on cutting on Tuesday, while an RBA cut and trade/tariff concerns reviving next week and/or a further run higher in US yields could see a test below 0.6200. I suspect the RBA cuts as is almost fully priced.