EUR/USD, GBP/USD, USD/JPY flows - mkt skewed vs upside risks with CPI data

Budget politics and US CPI still the main early week interest, dollar consolidating prior with EUR/USD holding to the 1.12~ reference after the early week test below. Oil still underpinned with ongoing attacks in Saudi and Axios suggesting Israel has been discussing with US strikes against Iran before the elections (though those calls said to be before Trump suggested would not before the midterms).

On the French front, as the Budget debate and amendment process continues, Lagarde switched back focus to ‘the primary and first solution lies at home’ on the fiscal front, backing off any suggestions the ECB would be getting involved at this point.

The FT meanwhile suggests UK Chancellor Healey is “expected to pay for all new giveaways in this month’s Budget with higher taxes or spending cuts rather than more borrowing” – though it will see some erosion of the fiscal rules headroom fiscal buffer, used as an event (Iran) 'contingency'. Having gone from a focus of market angst earlier in the summer, anything that is broadly responsible will continue to be viewed in a more favourable light in the current context. And indeed the UK came out relatively well from the latest IMF report, which was fairly positive on the UK and argued for staying the course rather than additional consolidation.

Today very much about the US CPI prints though, and here while we do look for an on-market 0.2%, in general terms you could argue that risks are to the upside given the high expected headline and the seasonal bias. Fed hike odds sit around 20-25% for Oct and 90% for December so today’s print is likely to be polarising. Reaction itself will be a pretty key tell, as it will be a good indicator of whether the dollar move is overbought and out of steam near-term and prone to a pullback (sell fact on 0.2%, or inability to rally on higher), or if it can manage a breakout for another leg first.

Expiries actually concentrate more tomorrow, with the largest EUR/USD (6bn+) at 1.125-275, so there may be some further desire to engineer a bounce there, if the data allows. USD/JPY  skew for the next couple of days is towards 158.