Macro/FX Watch: Impact from US CPI will likely be muted

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.