FX Update: US CPI on tap. GBP focus beyond Friday. FX Update: US CPI on tap. GBP focus beyond Friday. FX Update: US CPI on tap. GBP focus beyond Friday.

FX Update: US CPI on tap. GBP focus beyond Friday.

Forex
John Hardy

Head of FX Strategy

Summary:  The US dollar was largely quiet yesterday, with FOMC minutes confirming the general hawkish lean from the Fed, even if these saw a discussion of an eventual deceleration in tightening, something the market expects will unfold early next year anyway. But the JPY was quite weak across the board, taking USDJPY to new highs since the late 1990’s ahead of today’s event risk of the week, the US September CPI release, which may have a hard time moving the needle.


FX Trading focus: US CPI on tap. GBP focus beyond Friday.

Traders finally abandoned their fear of official Japanese intervention took USDJPY more firmly higher yesterday, to for the cycle since the 1990’s, even as US treasury yields remained tame. Elsewhere, the USD action was generally muted as EURUSD is finding the 0.9700 area sticky and GBPUSD bobs around near 1.1100, with the market mulling what will happen after the Bank of England halts its emergency QE measures, supposedly on Friday.

The next event risk is the September US CPI release later today and whether it moves the sentiment needle on any sharp new move in US treasuries, where yields have consolidated below the cycle highs of two weeks ago and near 4.00%. Judging from the last CPI release in September, where the hotter than expected core data jolted the market and sent the USD higher, we might expect that any surprises could move the market sharply. But in the intervening time frame, we have to remember that the September FOMC meeting spelled out for the first time in the Fed projections that the rate tightening regime was forecast to continue even as inflation is expected to slow considerably and unemployment to rise. The worst surprise for markets and aggravator of the USD rally would be a strong core print of 0.5% or higher.

The FOMC minutes released late yesterday showed that “Many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action.” This was not read as a huge surprise by markets, as Fed rhetoric has consistently pointed in that direction and the market expectations for Fed policy finally now reflect the Fed’s own “dot plot” trajectory of forecasts, in which rates are expected to end next year slightly higher than where they are seen ending this year. Previously, the market had persisted with the view that the Fed would blink at the first sign of trouble and cut rates quickly (note comments on September FOMC above ending that narrative). Still, there was a note of caution in the minutes as “ Several participants observed that as policy moved into restrictive territory, risks would become more two-sided, reflecting the emergence of the downside risk that the cumulative restraint in aggregate demand would exceed what was required to bring inflation back to 2 percent.” But that is already why the market is expecting less than 50 basis points of further tightening beyond the December FOMC meeting, so it is already “in the price”. Late yesterday, Michelle Bowman of the Fed’s Board of Governors argued for continued large rate increases and the early November FOMC meeting is nearly fully priced to deliver a 75 basis point hike, with December’s meeting priced at 50-50 odds of 50 vs. 75 basis points.

Chart: EURGBP
Watching GBP pairs into the end of this week and early next week as the Bank of England still claims that it will wind down its emergency QE tomorrow, while the FT has cited discussions among those in the know that believe the Bank will have to extend its operations. An interesting sign of scapegoating from UK Chancellor Kwarteng, who commented on the sidelines of a conference in Washington that any turmoil in the UK gilt market next week would be the BoE’s fault – an ugly scapegoating move. Two things are notable here: first, that the longer UK gilt yields rose yesterday back to where they were during the worst of the market disorder a couple of weeks ago even as the emergency QE is ongoing. And second: GBP has rebounded quite smartly today as yields have come back sharply lower from yesterday’s highs. At some point, isn’t this ironic? I.e., strong QE driving yields lower and a currency in a world where central banks are tightening and in the Fed’s case, doing QT. We won’t know the lay of the land until early next week – for now, watching GBPUSD and EURGBP closely. The 0.8850+ area in the latter suggests sterling stress, while 0.8575-0.8625 was the important zone on the way up.

Source: Saxo Group

Sweden’s CPI hits new cycle highs in September This shows how the energy crisis in Europe and the weak krona continue to drive higher inflation, even as headline inflation levels in the US, for example, rolled over after the June peak. The headline Swedish September CPI released this morning hit 10.8%, above the 10.5% expected and up from 9.8% in August, while the core inflation level rose to 7.4%,  slightly below the 7.5% expected, but up from 6.8% in August.

Table: FX Board of G10 and CNH trend evolution and strength.
The GBP status is uncertain after the huge pump back higher from the recent downdraft – still see the government having to go back on its fiscal plans as the necessary ingredient for GBP recovery (or some miracle that brings energy prices back to normal levels). Aussie remains down and out as the worst performer on RBA dovishness, and perhaps as a proxy for CNH concern – note USDCNH hitting 7.20 this morning.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
AUDNZD has capitulated well down through the key 1.1250 level, confirming a new down-trend, with the next big focus into the 1.1000 area. EURGBP is trying to reverse course – better ability to assess early next week.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1230 – US September CPI
  • 1230 – US Weekly Initial Jobless Claims
  • 0130 – China Sep. PPI/CPI

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 Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, 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-sg/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 Markets 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 Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

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 such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

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

The information or the products and services referred to on this website 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 intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.