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Sep 13 - 04:55 PM

EUR/USD - COMMENT-US Recap: EUR/USD Weathers Initial US CPI Reaction, ECB Next

By Randolph Donney  —  Sep 13 - 02:35 PM

Judging by the reaction to U.S. CPI and a Reuters story suggesting an ECB hike is more likely this week, the market was overly short Treasuries and long dollars coming into the session and now faces the governing council's decision as well as more top-tier U.S. data on Thursday.

The dollar index was near flat after ceding earlier gains tied to an above-forecast monthly rise in core CPI and higher than forecast overall increase from a year earlier.

Still, core CPI fell to 4.3% from last August versus July's 4.7% reading -- just as forecast -- which was disinflationary enough to keep a Fed hike next week fully off the table and one before year-end remaining near even money.

Two- and 10-year Treasury yields attracted strong buying interest after nearing, but failing to clear, this year's peaks that are the highest since before the GFC.

All that with top-tier U.S. data and the ECB meeting on Thursday and with the dollar index nearing some very stiff technical resistance.

EUR/USD fell 0.14%, but was well off the 1.0712 Wednesday low on EBS, supported by higher bund-Treasury yield spreads following the Reuters higher ECB inflation.

Treasury yields tumbled to modest losses from their initial CPI reaction heights.

An ECB rate hike on Thursday is priced as a 64% probability after being well below 50% on Tuesday.
However, a hike on Thursday would make any further rate rises highly unlikely, with euro zone industrial production adding to a run of below forecast data.

One more Fed hike by year-end will likely require U.S. inflation to surprise on the upside in coming months.

Sterling was flat, having recovered from a first fall on disappointing UK GDP data and a second spike lower after the U.S. CPI, but Wednesday's 1.2434 low held the 200-day moving average at 1.2432 and shot back up amid the broader dollar retreat.

USD/JPY rose 0.18%, less put off by the drop in Treasury yields because JGB yields are relatively static and concerns about a potential BoJ rate hike or imminent MoF FX intervention have receded.
But prices will need the uptrend in Treasury yields to resume to forge closer to 150 or last year's 32-year peak.

Aussie was flat and the offshore yuan gained 0.4% on hopes China's FX actions and housing stimulus efforts will provide some financial and economic stability amid growing tradepolicyconcerns.

For more click on FXBUZ

Refinitiv IFR Research/Market Commentary


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