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Macro/FX Watch: Impact from US CPI will likely be muted
Charu Chanana
Head of FX Strategy
Summary: US inflation release today could have a tough time bringing in any hawkish tremors or dollar upside, and that task will be left up to Fed speakers or Biden-Xi talks ahead of US shutdown risks taking the spotlight again later in the week. Yen bears being cautious of 152 but could be emboldened as options expiry passes. Key tests for sterling ahead with wages and inflation data expected to cool.
Key points:
- US CPI for October will likely confirm disinflation in headline
- Core CPI could be sticky, but market is unlikely to price in more rate hikes
- Dollar to remain range-bound this week as focus also on Fed speakers, Xi-Biden talks and shutdown risks
- Momentum signals downside for NZD and JPY but upside for SEK and GBP
- Speculators could continue to test USDJPY move above 152 cautiously
- GBP key tests ahead with wage and inflation data due and dovish surprises could be likely
USD: CPI unlikely to bring any hawkish tremors
US October CPI is scheduled for release today, and should likely emphasize the disinflation story. The sharp fall in gasoline prices, as well as the decline in vehicle sales on the back of higher car loan borrowing costs, will likely bring the headline print lower. Consensus expects headline CPI to ease to 3.3% YoY from 3.7% previously and come in at 0.1% MoM from 0.4% in September. Core is however likely to be sticky and consensus expects unchanged prints at 4.1% YoY and 0.3% MoM. Rent inflation should continue to moderate, and indicators are pointing to a more pronounced disinflation in the next few months. However, the bar for a hawkish surprise is high, and core will have to come in at or higher than 0.5% to bring back focus on Fed’s higher-for-longer.
There will be more tests for the US consumer this week. PPI and retail sales are also reported on Wednesday, and headline retail sales print is expected to turn negative. As such, overall message from the week will likely continue to be that of higher interest rates starting to take a toll on the US consumer and the economy. Therefore, a dollar positive environment is unlikely.
Hawkish Fed speak last week bought DXY index to test the 106 handle last week, but it failed to break above. Fed speakers will be in focus again this week, and their take on the October CPI print will likely remain a bigger driver for the US dollar. In addition, focus will be on Presidents Joe Biden and Xi Jinping meeting in San Francisco midweek at the APEC conference. Any conciliatory tones could further add to the dollar downside, erasing the geopolitical premium. Further down the week, threat of a US shutdown still looms which could still bring another test of 106/106.30.
Market Takeaway: Dollar still likely to remain range-bound despite more signs of weakening US economy. Momentum signals downside for NZD and JPY but upside for SEK and GBP.
JPY: Options expiry or suspected intervention?
USDJPY got in close sight of the 152 handle again. The breach of 151.90 to a fresh one-year high brought an immediate sharp slide lower to 151.20 before the pair returned to trade back above 151.60. While the move could have been driven by suspected intervention, options expiry could have also played a part. The move was similar to the one on October 3, and options expiry of the order of $1.25 billion is suspected to be behind it. If that is actually the case, there is another over $2bn of options expiry coming up on Wednesday at a strike of 152 which brings the possibility of a similar snapback. However, as the options expiry clears up in the days ahead, USDJPY could move higher to test 152 or higher levels. Japan’s top currency diplomat Kanda was also forced to resign yesterday for non-payment of taxes, which could mean speculators may test further upside.
US CPI release today will also be key for where JPY goes. Any upside surprise could mean further pressure on JPY, but the impact is unlikely to be linear. A downside surprise is unlikely to bring a significant relief for JPY as Fed rate cuts still remain distant. Yen bears may return if USDJPY was to slide any lower than 151. Japan’s Q3 GDP is also scheduled for release early tomorrow morning in Asia. While Japanese data is less of a mover for JPY, a sharp contraction will weaken the conviction on any potential BOJ exit, further inviting JPY bears to test 152 yet again. Consensus expects Q3 GDP to come in at -0.4% annualized from +4.8% previously.
Market Takeaway: Yen bears are being cautious ahead of 152 for now, but clearing up of options expiry and Kanda’s exit could mean more dip buyers could emerge.
GBP: Data dump ahead
Sterling downside has stalled recently as GBPUSD bounced back higher from 1.22 handle. Friday’s GDP data showed some stability with the start of contraction delayed. However, a lot more tests are due this week as wage data is reported today and CPI tomorrow.
Consensus expects October payrolls to continue to trend negative, while September wages are expected to slow to 7.3% 3M YoY average gain from 8.1% previously. While that will still be high, but there is enough reason to believe that BOE tightening is working through the economy. The BOE also has recently downplayed the stickiness in private wages, so a minor upside surprise could also still likely be discounted. In addition, CPI due tomorrow is expected to show a sub-5% print from 6.7% YoY in September amid the adjustment in energy tariffs. The all-services inflation, which is a key BOE focus, is expected to be steady at 6.9% as per the central bank’s forecast so the room for a downside surprise is significant.
With BOE staying on a pause at the last two meetings, these data prints will further add evidence that the BOE tightening cycle has ended. However, there is a significant room to bring forward rate cut expectations if UK economy weakens faster than expected. We think that BOE is over-estimating the data, and dovish surprises remain likely for services inflation as well as wage metrics, suggesting GBP downside.
Market Takeaway: GBPUSD could test 1.22 again and the next support level to watch is the 76.4% retracement level of 1.2129. EURGBP could test 0.8750 ahead of 0.88.
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