FX Update: USD on edge ahead of the US CPI data tomorrow. FX Update: USD on edge ahead of the US CPI data tomorrow. FX Update: USD on edge ahead of the US CPI data tomorrow.

FX Update: USD on edge ahead of the US CPI data tomorrow.

Forex
John Hardy

Head of FX Strategy

Summary:  Market sentiment improved further yesterday before dipping slightly overnight, as China Covid cases are on the rise, pushing back against hopes for a lifting of Covid restrictions. In the US mid-term elections, Democrats are slightly outperforming expectations, possibly set to retain control of the Senate even if Republicans look set to take narrow control of the House of Representatives.


FX Trading focus: Next test for struggling USD over tomorrow’s US CPI data.

The US mid-term election results are still rolling in this morning in Europe, with the Republicans set to take a small majority in the House and the Senate outcome looking at risk of riding on the outcome of a Georgia run-off election on December 6th as neither candidate looks set to achieve the 50% required for elections there. Remember that we had a similar setup after the 2020 election when two Senate races in Georgia were only decided in a January 5 run-off. There are no real market conclusions from the outcome, even if the Georgia race gives the Republicans a majority in the Senate, as the only scenario that would have guaranteed dramatic potential for fiscal policy would have been the Democrats surprisingly retaining both houses. Other conclusions: Trump is a liability for the Republican party, which likely would have done far better without his involvement, and forensic studies of split-ticket voting will likely confirm this, and it will be interesting to see if this deters his possible renewed ambitions for the presidency. Finally: razor thin Georgia results keep alive the narratives around election fraud, etc. Can the US move beyond its dysfunctional elections by 2024 or will the republic face an existential test in that election cycle?

Back to incoming data, with tomorrow’s US October CPI in focus. Let’s recall that the September CPI data point was a real shocker as many qualified slicers and dicers of the data were looking for a deceleration in the core data rather than the acceleration we got. That has me leaning for a slightly softer release tomorrow. But I am far more interested in the nature of the market reaction. As I have discussed the last couple of days on the Saxo Market Call podcast, I find the most interesting test for the US dollar one in which we see inflation decelerating and US treasury yields perhaps easing a bit lower, but in which we also see risk sentiment weak as equity and bond markets are starting to decouple, as equities begin to fret recession rather than being merely led around by the nose by the treasury market. If that is the scenario we get and the USD weakens, then I think USD weakness can extend a bit more forcefully for a time, if not, then the USD could yet reject this breakdown attempt. I withhold judgement for now, as the USD has not yet broken down. But the easiest thing to do is to simply judge what happens on the charts in the wake of the data release (not knee-jerk, but how the day closes), as we have a number of clear-cut levels in play for the major USD pairs.

Chart: USDJPY

USDJPY has traditionally been a strong focus over US data surprises over the years and will be in focus with the macro event risk of the week, if not the month, coming up tomorrow in the form of the US October CPI release. Reaction in yields and risk sentiment are both worth watching as I have cooked up some thoughts of late (see above) on whether US treasury markets and equity markets could move out of correlation, i.e., that risk sentiment may have a hard time celebrating a drop in treasury yields. So, a weaker than expected US CPI report together with falling treasury yields, but also together with weak risk sentiment could provide the strongest support for the JPY here in a broad sense, though it might be felt more forcefully in JPY crosses. Regardless, if the JPY finds bids tomorrow, the 145.00 level will be a huge focus in USDJPY.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
The USD is clearly down, but will only be out on sticking further weakness in the wake of the US CPI release tomorrow. Elsewhere, note the sterling momentum turning badly south and SEK trying to look higher, not a surprise given European equities having rallied vertically for weeks – looking a bit much.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
EURGBP is one to focus on around the 0.8800 level. JPY crosses are interesting in places as well as yields have consolidated a bit lower – look at the 165 area in GBPJPY, for example. But it is all about key USD levels after the US data tomorrow, including 1.0100 in EURUSD, 0.6522 in AUDUSD, etc…

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1200 – Mexico Oct. CPI
  • 1300 – UK Bank of England’s Haskel to speak
  • 1530 – EIA's Weekly Crude and Fuel Stock Report
  • 1630 – UK Bank of England’s Cunliffe to speak
  • 1700 – World Agriculture Supply and Demand Estimates (WASDE)
  • 0001 – UK Oct. RICS House Price Balance
  • 0100 – US Fed’s Kashkari (Voter 2023) to speak
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-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 Capital 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.