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[MARKET ANALYSIS] USD eyes US CPI, whilst EUR digests ECB source reports which suggest the hike debate could be as early as October

The setup is a familiar one: a US CPI print landing days before a Fed decision, with the market framing the reaction function through a single official's stated conditions.

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[MARKET ANALYSIS] USD eyes US CPI, whilst EUR digests ECB source reports which suggest the hike debate could be as early as October

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  • Snapshot: G10s are mixed against the USD this morning. NZD is the clear outperformer, as traders increased their bets of further hikes at the RBNZ, with markets now pricing in four hikes at the Bank. Elsewhere, the CHF and Loonie are the slight laggards, but remain flattish.
  • USD is steady and trades within a 99.00 to 99.17 range. Thursday saw the release of a mixed PPI report, which ultimately spurred little reaction in the USD. But the Dollar did strengthen in the prior session on account of higher yields. Focus today is solely on the CPI report, which will be a decisive factor into the Fed policy meeting next week. A benign report showing continued progress on underlying inflation would strengthen the case for the Fed to remain on hold, particularly given Waller's stated reaction function. Conversely, a hot report or evidence that disinflation is reversing would likely reinforce expectations for a 25bp hike.
  • Core CPI is expected to rise 0.2% M/M in August, unchanged from the July print, while the Y/Y rate is anticipated at 2.4% (prev. 2.5%). Headline CPI is expected to rise 0.4% M/M, accelerating from the prior 0.1%, while the Y/Y rate is seen at 3.4% (prev. 3.4%).
  • EUR is flat this morning and holding within a 1.1599 to 1.1617 range, in the aftermath of the ECB policy decision on Thursday. Thereafter, ECB source reports suggested that officials expect more tightening this year, with the debate potentially as soon as October. As such, sell-side banks have broadly pulled forward their bets of another hike at the ECB; the likes of Citi, Barclays and UBS see another round of tightening in December. Interestingly, Danske Bank believes that the Bank will deliver two 25bps hikes, each in October and December.
  • JPY is slightly firmer this morning, with USD/JPY holding around 154.20, in a 153.96 to 154.61 range. Overnight, a Reuters source report reiterated that the BoJ will raise rates next week, and potentially signal its readiness to speed up hikes. The report, alongside some scaling back of the pressure seen in the prior session, has helped the Yen this morning. The next hurdle for the currency will be US CPI, where a hot report will likely see yield differentials widen once again.
  • GBP is currently flat, but did see some mild upside following a strong GDP report earlier. In July, the UK economy grew 0.4% (exp. 0.00%), largely thanks to a boost in AI. While the data signals economic resilience, it is unlikely to alter expectations for next Thursday’s BoE policy decision. It does, however, provide the MPC’s hawks with ammunition to argue for tighter policy.
Context

In past episodes of this kind, a pre-meeting inflation release that matches consensus has tended to leave the Dollar range-bound while one that surprises has driven the front end and the Dollar in the same direction, with the asymmetry lying in how close the meeting is. The more novel thread is the ECB source reports pulling the hike debate forward to October. Source stories of this kind have historically been a deliberate channel for steering expectations between meetings, and the tell is whether sell-side calls converging on December and October force the Governing Council to confirm or push back, since unrebutted source reports have tended to harden pricing. The BoJ thread runs through the same yield-differential channel: a hot US print widens spreads and has typically unwound source-driven Yen strength before, while a soft one compounds it. Worth noting that positioning into a cluster of central bank decisions has in comparable weeks favoured range-trading until the data resolves, with NZD's outperformance on repriced RBNZ bets the kind of idiosyncratic divergence that tends to fade if the US print dominates. The calendar sequence, CPI, then the Fed and BoJ in short order, is the operative structure.

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