USD flows: USD falls despite stronger CPI

US CPI stronger than expected both headline and core, but the impact has been offset by higher than expected initial claims data for the latest week. While the USD initially gained ground across the board, it has now fallen back, with USD/JPY leading the way. USD/JPY is 40 pips lower and EUR/USD 20 pips higher. The market has marginally reduced the probability of 25bp rate cuts at both the November and December Fed meetings, but US 2 year yields are slightly lower.

From here, there may still be scope for the USD to recover against the EUR, as front end yields still suggest scope for EUR losses, but there is less scope for a recovery against the JPY, as yield spreads already suggest USD/JPY is stretched and equities have weakened on the data, which will tend to benefit the JPY, particularly on the crosses.