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[MARKET ANALYSIS] DXY under mild pressure whilst GBP gains post-GDP; Aussie lags after cooler-than-expected CPI

This is a multi-driver G10 session of a familiar kind: a soft dollar undertow from dovish Fed commentary, idiosyncratic data beats and misses doing the relative work, and event risk stacked into the next print.

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[MARKET ANALYSIS] DXY under mild pressure whilst GBP gains post-GDP; Aussie lags after cooler-than-expected CPI

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  • Snapshot: G10s are mostly firmer against the USD this morning, which has been hampered following dovish comments from the Fed’s Williams on Tuesday. GBP leads post-GDP, whilst the Aussie lags post-CPI.
  • DXY is a touch lower this morning, and trades within a 101.19 to 101.46 range; ultimately holding within the prior day’s confines. Some of the mild pressure today is facilitated by Fed’s Williams, who suggested that there was less of a need for a hike in October given the recent move in September. The downside in USD is nonetheless capped given he clarified that one more rate hike “late this year” may be appropriate.
  • The geopolitical environment remains clouded by uncertainty; as it stands, Iran’s Foreign Minister presented the US proposal to President Pezeshkian, which Iranian officials will likely review. Markets will be attentive to their response – where any overt rejection of the US proposal could see heightened odds of another round of fighting.
  • On the data front, PCE is due today. Analysts expect the PCE headline to rise by 0.4% M/M (prev. 0.2%), and the annual rate is seen ticking up to 3.8% Y/Y (prev. 3.7%); core PCE is expected to rise by 0.3% M/M (prev. 0.2%), with the annual rate of core PCE seen rising to 3.4% Y/Y (prev. 3.3%). Another factor to note, the Bureau of Economic Analysis will release updated PCE deflator methodology, applied retroactively through Q1 2021. RBC estimates that core PCE’s annual pace is expected to fall 18bps, which would revise July’s reading to 3.1% from 3.3%.
  • GBP currently holds towards the top of the G10 list, with Cable holding at the upper end of a 1.3223 to 1.3278 range. The strength comes after mild revisions higher in Q2 GDP, though will likely have little impact on the BoE in the near term. Elsewhere, the JPY also performs well, continuing the strength seen overnight. This comes despite poor Japanese Industrial Production data overnight. In the European morning, Nikkei reported that PM Takaichi will vow a nimble response to unexpected market moves.
  • EUR is a little firmer this morning, digesting inflation reports out of France and German states so far. French inflation topped expectations amidst rising energy costs, whilst German state metrics held a slight hawkish skew. Overall, nothing all too surprising for the region, given that ECB members have continued to voice concerns about the inflation outlook; however, a sustained rise in prices, evidence of second-round effects and/or lack of US-Iran progress will likely bring an October rate hike into view.
  • AUD is the laggard this morning, following a weaker-than-expected CPI report; odds of a November hike are priced in at 24%, with a number of key metrics due until then. Westpac analysts reiterated their call for a hold at the November meeting following the inflation figures.
Context

Williams-type remarks, where a hike is framed as less necessary for the near meeting but kept alive for later in the year, have historically capped rather than reversed dollar strength, since they shift timing at the front of the curve without changing the terminal question; the tell is whether other officials echo the sequencing or push back. The methodology revision to the PCE deflator is the less standard feature: retroactive changes to the Fed's preferred gauge have in the past mattered more for the level of the easing or tightening debate than the single monthly print, and a mechanical downward revision to core would complicate how a hot headline is read. Sterling's post-GDP bid fits the pattern of revisions-driven moves that fade absent a policy read-through, which the note itself flags. The Aussie lag after a cooler CPI is the cleanest channel, front-end pricing of the next meeting is the transmission, and inter-meeting data typically rebuild or bury the case. The geopolitical overlay is a binary: acceptance keeps the risk premium where it is, overt rejection has historically re-priced crude and havens first, FX second.

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