[MARKET ANALYSIS] USD weaker in thin trade ahead of FOMC minutes and long auction
- Focus on yields remain with the USD weaker against most G10 peers today as bonds stabilise around recent lows; the oil story is similar, Brent remaining above USD 90/bbl. Action this morning has been isolated to FX, USD weakness emerging against all peers without a clear driver, EUR/USD rising back above 1.16 while Cable breached 1.3550, DXY below 99.50, familiar levels in recent sessions. The summer conditions likely a factor in the news-absent moves, especially ahead of risk events 1) FOMC minutes, and 2) 20yr auction, both of which have increased focus amid 1) the lack of Fed Chair Warsh’s communication, 2) recent weakness in the long end and it being potentially the most expensive for the Treasury in 25 years. Ahead of this, STIRS are steady with the market assigning a c. 30% probability of Fed tightening in September.
- No major GBP move to UK CPI, which, in short, continues the narrative that the BoE is comfortable at 3.75% with data continuing to not surprise vs. market and BoE’s July MPR forecasts. The headline rise reflects the Ofgem price cap introduced this month, a point which was partially offset by a decent moderation in food inflation. Services moderated as expected, while ING notes the BoE's core services measure of inflation has picked up a little to 3.8% Y/Y, which, while hotter, shouldn't be too much to encourage those on the fence for tightening. In conjunction with the soft LFS on Tuesday, both show sufficient evidence to keep the BoE on hold for the rest of the year, with risks tilted both ways.
- JPY is the G10 outperformer, benefitting from a softer Buck as the pair looks to return towards 159.00 after nearing 160.00 in the previous few sessions. Macro catalysts were light, though strength seen in KRW (see below) could have given a helping hand also. USD/JPY marked a session low of 159.05, a little off this level at the time of writing.
- KRW is the clear EM outperformer (USD/KRW -1.3%) with overnight optimism helped by news that SK Hynix is to buy back KRW 40tln in treasury shares, the chipmaker erasing earlier c. 8% losses. Elsewhere, CEE are flat against EUR in thin trading conditions; with EZ CPI unrevised as expected.
Pre-FOMC-minutes sessions in thin summer conditions have a well-worn pattern: directionless drift in the dollar, exaggerated moves on no news, and a reluctance to commit ahead of the event risk. Moves of this kind, absent a driver, tend to mean-revert rather than extend once liquidity normalises, so the established read is to treat familiar levels being retested as noise rather than signal. The more substantive thread here is the long end: minutes plus a 20-year auction into recent duration weakness is the combination that has historically set the tone for both curves and the dollar, and a soft tail at a poorly bid tenor tends to steepen and pressure the long end further, with the dollar's reaction hinging on whether yields or risk sentiment dominate. A stated probability of near-term tightening, even a minority one, is itself the tell: pricing that includes a hike tail has historically made minutes more market-moving than when the path is one-sided, since the text is read for how wide the internal split runs. The UK inflation print landing broadly in line, with the administered energy component doing the lifting and services behaving as forecast, fits the pattern of prints that entrench a hold rather than shift it. The KRW move is idiosyncratic, driven by a large corporate buyback rather than macro, and episodes of that kind rarely propagate beyond the session unless followed by further flow.