FX Update: USD breakdown likely set to extend.

FX Trading focus:

• USD gutted by low US inflation figures – need more data, but the move is technically decisive
• The focus shifts somewhat away from JPY strength, as pro-cyclical currencies jumped yesterday.
• EURGBP bullish reversal = some sterling exhaustion setting in?

USD breaks lower after soft US CPI
The June US CPI data came in softer than expected, triggering an ugly slide in the US dollar as the core numbers were particularly in focus: not only missing the 0.3% M/M that was expected, but narrowly missing dropping below 0.2% with a 0.157% reading. The Y/Y number fell to 4.8%, the lowest since last 2021, and the headline dropped all the way to 3.0% on what will prove the most favourable year-on-year basing comparison for some time. There are some ironies here, in that the big come down in inflation on key expenses like energy, the fact that many US homeowners have stayed put in their current residence after their refinancing at record cheap mortgage rates during the 2020-21 pandemic years, and with higher incomes from strong wage gains, risk seeing services inflation in particular staying at a higher level for now as economic growth could extend before the long and lagging effects of the Fed’s policy tightening and banks’ credit tightening begin to weigh.

Another potential contributor to a reheating of the US economy and inflation are the financial markets themselves, as options-based compensation will be a boon for elite incomes and the wealth effect (feeling more confident about consuming because portfolios are in good shape) may kick in. For now, this does not concern the market, which seems happy to trade what we called the Disinflationary-no-landing-nirvana scenario in today’s Saxo Market Call podcast, which has Fed policy expectations for next year dropping like a stone from their peak of just a week ago. Even as the market holds its view that the Fed will likely hike the week after next, it is pricing more than 150 basis points of Fed rate cuts by end of next year. The June 2024 SOFR contract has rallied more than 50 basis points off its lows of a week ago. All of this apparently without fretting a recession (the easing yields feeding a powerful extension of risk-on in asset markets). Sounds to good to be true and the irony here may be that the market will have to price a higher Fed peak – but that is getting ahead of ourselves.

The move lower in the US dollar has such strong momentum, it may carry through for a while here, starting with a level like 1.1500 for EURUSD and 0.7000+ for AUDUSD. Whether the AUD and other pro-cyclical currencies (SEK suddenly a phoenix-from-the-flames yesterday) continue to get a leg up in this market will depend on whether the global growth story shapes up more strongly in coming weeks, especially from China, which reported ugly trade numbers for June overnight (probably what kept AUD on the soft side in the AUDNZD cross – but watching metals prices for a possible shift in sentiment more in favour of AUD). The recent broad JPY strength is suddenly less of a focus with risk appetite enjoying a strong spell. If energy prices extend after their breakout and the sentiment on global growth improves, JPY performance could prove indifferent for a spell.

Chart: EURUSD
EURUSD has broken up above the year highs just ahead of 1.1100, extending above 1.1160 in today’s trade and could be on its way to 1.1500 or even higher, although the move is so steep, some consolidation could set in, perhaps as soon as the 1.1275 (the 61.8% Fibo of the entire sell-off from post-pandemic highs to the panic lows of late last year)? Only some climax reversal in the next few session would bring some caution for bulls here.