US FX WRAP: DXY rises; hawkish Japan CPI report/BoJ sources; EUR hit on weak PMI data

USD: The DXY rose on Friday, though it is still set to end the week with slight losses. PMI data showed US business activity slowed in October, but robust demand continued to fuel inflationary pressures. The flash composite PMI fell to 57.6 (prev. 58.4), while new orders rose to 58.2 (prev. 58.1). Output prices reached 59.8, the highest since August 2022, amid worsening supply bottlenecks. Elsewhere, final University of Michigan data showed consumer sentiment fell to a five-month low in October amid persistent inflation and rising interest rates. Headline sentiment slipped to 48 (prev. 48.1), slightly beating estimates, while one-year inflation expectations rose to 4.7% (prev. 4.6%) and longer-term expectations reached 3.5% (prev. 3.4%), both the highest since May. Looking ahead, traders are eyeing next week's FOMC policy meeting (a hold is expected, with a hike priced for December), PCE inflation data (seen ticking up after the hot CPI/PPI metrics) and the advance Q3 GDP release.

EUR: The Euro slipped after weak PMI data, which showed Eurozone private sector growth at a four-month low, dragged down by a renewed French contraction. French bonds saw some reprieve after the recent selling; still, traders will be mindful of French protest action over the weekend. More broadly, next week's ECB meeting is coming into focus, where the central bank is expected to hold rates, although markets are pricing a 66% chance of a December hike.

JPY: The Yen strengthened overnight following Japanese CPI data and a hawkish-leaning BoJ sources report, but gave up its gains amid USD strength during the US session. Core CPI accelerated to 2.1% in September (exp. 2.1%; prev. 1.7%), exceeding the BoJ's 2% target and strengthening expectations of a December rate hike. Inflation ex-fresh food/fuel rose to 2.4% (prev. 1.9%), signalling broadening price pressures. Meanwhile, Bloomberg reported that the BoJ may maintain a rapid pace of rate hikes, with December the next potential move; officials believe underlying inflation has broadly reached the 2% target, while the current policy rate remains some distance from neutral.

NZD: The Kiwi outperformed on Friday, with reports noting that the RBNZ is widely expected to raise rates by 25bps next week, ten days before the country's general election. Swaps pricing implies roughly an 85% chance of the move, and close to even odds of a further rise to 3.25% in December. ANZ issued a hawkish call and now expects three more hikes from the RBNZ.

GBP: The Pound digested weaker-than-expected UK retail sales amid concerns over the Middle East situation and uncertainty ahead of next week's Autumn Budget. UK PMI data was more upbeat, although price pressures remained a key concern.