FX Update: US CPI to set the tone for FOMC and USD. FX Update: US CPI to set the tone for FOMC and USD. FX Update: US CPI to set the tone for FOMC and USD.

FX Update: US CPI to set the tone for FOMC and USD.

Forex
John Hardy

Head of FX Strategy

Summary:  Today’s May US CPI release will likely set the tone for the US dollar via its impact on the odds of the Fed hiking rates tomorrow, which are seen as quite low coming into today’s key data release. Elsewhere, the AUD is sitting atop the G10 strength chart after China announced a surprise rate cut to one of its rates ahead of Thursday’s regularly scheduled meeting. And UK labor market and earnings data this morning were very strong.


Today's Saxo Market Call podcast

FX Trading focus:

  • USD on its back foot as risk sentiment continues to soar – US CPI later today the obvious focus, but will the Fed’s “third mandate” (the S&P 500) play any role in tomorrow’s decision?
  • UK labor market data comes in strong, with sharply improved revisions of key April numbers.

Trading and bias notes:

  • USD: Two-way risks in the coming two days. On a soft CPI print and the Fed delivering a pause, we likely have room for USD to test significantly weaker – for example, EURUSD toward top of range. A hot core CPI print and Fed rate hike could be felt most strongly in USDJPY, especially if BoJ holds off from even hinting at anything on Friday.
  • NOK: EURNOK backing up on weak Q1 Norway GDP report. After recent reversal, bears in EURNOK in charge as long as the price action stays south of 12.00
  • GBP: Very choppy – traded to local highs yesterday on rhetoric from BoE’s Catherine Mann before significant consolidation lower – back higher today on strong labor market data.
  • JPY: lurking in the background is the Friday BoJ meeting – even guidance for an eventual tweak to the tightening side could drive significant volatility/JPY upside, with the scale of that volatility dependent on whether Fed pauses or hikes.

Hot UK labor market data this morning pumps UK yields to new cycle highs.
Some very positive revisions to ugly April UK labor market data have changed the plot here again for the Bank of England. The Payrolled Employees figure was inline at +23k for May, but the strong revisions to April data, from original –136k up to +7k wiped away concerns, even if the moving average is still trending in the wrong direction. More good news was in the May Jobless Claims numbers, which fell –13.6k, while April figures there were revised down to +23k from what was originally a two-year high of +47k. The April Employment Change figure (3-months/YoY) was +250k, a new high since May of last year, while the April Unemployment rate dropped to 3.8% from 3.9% and versus 4.0% expected. Average Hourly Earnings for April were far higher than expected, at +7.2% ex Bonus YoY vs. 6.9% expected and 6.8% in March. This mix of data jolted the UK 2-year yields another 18 basis points higher to new highs above the chaotic period last fall during the Kwarteng-Truss mini-budget debacle. GBPUSD revived on this, but much of that was a weaker USD, and it is interesting to note the weak transmission of higher UK yields into sterling as measured by EURGBP today, which is flat to slightly lower today after rallying sharply yesterday from new lows (on BoE Catherine Mann voicing concerns on sticky inflation).

Today’s US CPI sets up the FOMC tomorrow
Today’s US CPI looks set to drive significant volatility as risk sentiment is in near melt-up mode coming into today’s release (Warning: we have significant US equity market intraday volatility risk on so-called zero-days-to-expiry options that can risk driving wild swings in the intraday action in both directions. Extremely short data options have driven new patterns in intraday volatility and some considerable volatility events outright: most impressively on the December 13 release of the surprisingly soft CPI November CPI, which saw the market rally some 3% and then deflate back to unchanged all within a few hours). Was yesterday’s odd combination of a strong rise in the market and a large rise in the VIX a sign that market participants are loading up on short-dated options. I only bring this up because asset markets move in synch on volatility inducing events, so it may be necessary to keep a cool head in the event of a surprise in the data. Given strong sentiment and the market’s assessment that odds are low for a hike tomorrow, the more impactful “surprise side” could be in hotter-than-expected core inflation – anything above the 0.4% MoM expected. And even if we get an in-line to soft print, we have to be wary that some of that is already in the price.

As well, if we see a softer than expected core US CPI print today and the market continues to melt-up, could the action raise Fed concerns on the financial stability front, the so-called “third mandate” for Fed policy? I wouldn’t care to quantify that risk, but a wild market rally after the Fed has carried out its largest rate hike cycle in decades must sit poorly with the Fed here on the weakness of its policy transmission.

Chart: EURUSD
EURUSD faces an important test in coming days on the US CPI release today and then the FOMC tomorrow and ECB meeting Thursday. The latter is surrounded with little anticipation on the recent weak European activity data. The pair will most likely be driven by USD direction, therefore, more than EUR direction. A weak US CPI print today and a Fed move to pause could set us back on the path to 1.1000 and higher, while any hot core CPI release today and a Fed decision to move tomorrow rather than waiting for July could have us testing the recent lows below 1.0700 again. The volatility may not stop if Friday sees any hawkish surprise from the Bank of Japan, which could punch the USD lower broadly if the Fed has paused ahead of this meeting, and perhaps even if it hasn’t. Bank of Japan surprises will have the most impact this week.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
AUD and CNH heading in opposite directions with the most energy at the moment. The USD view is neutral here, awaiting CPI/FOMC.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
AUDCNH has reached a remarkable reading close to 10.00, the most stretched of all market trends at the moment.

Source: Bloomberg and Saxo Group
Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US May CPI
  • 1700 – US Treasury to auction 30-year T-bonds
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.