FX Daily Strategy: Asia, Sep 11

EUR/USD saw a modest intraday ‘sell the fact’ out of the ECB meeting, unwinding some of the hourly chart upside drift prior. That however was arguably more of a day-trader adjustment than any real judgement on the outcome, with the pair pulled back to the 1.16~ main options expiry of the day as an anchor. US PPI data meanwhile within expectations but sufficiently firmer than comfortable to keep attention very heightened into US CPI today.

In terms of the ECB itself, the outcome was actually relatively hawkish in presentation, notwithstanding the adoption of the ‘data-dependent, meeting-by-meeting, no pre-commitment’ language, as well as characterising risks as to the upside on inflation and downside on growth. New forecasts see nearby forecasts revised up, inflation averaging 2.5% next year (2.3% in June), and 2.6% core (2.5%), before returning to headline of 2.1% in 2028(2.0% previously and now 2.3% core). Forecasts of course always embed market expectations.

Lagarde would not be drawn into any teasing questions that circled around how the prior meeting 'characterised the market as understanding the ECB reaction function', what a forecast inflation overshoot means for policy, or any related loaded issues - not unreasonably noting that uncertainty swamps any forecast details beyond making the past meeting "a no brainer". The results nonetheless initially lent the market to more than validate their expectations. Now even the next October meeting is close to 50-50 odds on an immediate follow up, with the full hike more than in by December and out to 3.25% by next summer. The outcome then, in and of itself, wasn’t euro negative and actually in a different context would have likely seen a rally.

FX positioning and options factors aside today’s US CPI data on the other side of the ledger also clearly loomed large and is very much part of the expected choppy action anticipated for the pair for this week. We do look for upside risks to this release, looking for monthly gains of 0.4%, and 0.3% ex food and energy, albeit only marginally rounding up, with a rebound in lodging away from home pushing the core upside.

There is a lot of sensitivity around this given how Fed’s Waller highlighted inflation data as the key conditional factor for his vote and with current Sep Fed expectations on the fence, albeit firming back towards 65% for a hike now having been back to 50-50 at one stage.

This still leaves PCE data to come but if we do see an upside from CPI today that could give odds a further lift and a kneejerk dollar lift on the day. The DXY has held the 98.60 lows and lifted to 99, and any nudge through 99.20 could see some intraday follow through to 99.50 and congestion just above.

USD/JPY meanwhile continues to consolidate and unwind oversold conditions after its fast move. In the event that CPI does see an upside surprise, then the pair will further test the 154.00-154.50 upside, any clearance of which would squeeze up towards the 155.00 - 155.25 barrier, but with increasing supply expected to materialise on strong recoveries given the overall bearish skew and apparent long-term selling interest.