ECB Meeting may be a Non-Event, US CPI is Key

[Ben Graham]

Overview: The US dollar enjoys a firmer today ahead of the CPI and ECB meeting outcome. After falling to a new low for the year against the Chinese yuan earlier today, it has recovered and is higher on the day. The market is pricing in almost a 10% chance of a 50 bp cut next week, but a rise in the headline CPI, the fourth in a row, can see this re-assessed, which could help the greenback extend its recovery. There is little doubt about the outcome of the ECB meeting. It will stand pat while updating its macroeconomic forecasts. The dollar is enjoying a firmer tone against the emerging market currencies too. 

The new French prime minister is talking with the various parties before appointing ministers, but the French 10-year premium over Germany has narrowed slightly more today and French stocks are outperforming the German DAX. European benchmark 10-year yields are mostly slightly firmer but for France and Italy today. Remember, Fitch is set to announce the results of its credit review of France late tomorrow (currently AA- with a negative outlook). The 10-year US Treasury yield fell to a five-month low yesterday, slightly above 4.02% and is now 4.04%-4.05%. Equities are mostly firmer today. The Nikkei is at a new record high, and China's CSI 300 surged 2.3%, the biggest gain since mid-March, with AI-related shares in high-demand by retail investors. Only Hong Kong and Australia among the large bourses failed to gain today. The Stoxx 600 in Europe is firmer, recovering from yesterday's minor loss, and US index futures are firmer. Gold is heavy. The record high was set Tuesday, almost $3675 and has been sold through yesterday's low (~$3620). Initial support may be around $3600. Yesterday's geopolitical tensions in the Middle East and Eastern Europe helped lift October WTI for the third consecutive session, but the lack of further development has seen it steady today. It is little changed around $63.50. 

USD: The Dollar Index traded choppily yesterday in a roughly 97.60-95 range and is edging up to fray the 98.00 level in late European morning activity ahead of the CPI report. A move above 98.25 lifts the technical tone. Yesterday's session low was recorded around two hours after the PPI report, but it recovered and settled little changed on the day. Yesterday's PPI was softer than expected, falling 0.1% last month at the headline and core levels, and July's 0.9% gain was trimmed to 0.7%. Today's CPI is more important in terms of policy and implications for the PCE deflator. A 0.3% increase in the headline CPI would lift the year-over-year rate to 2.9%, the highest since January. But, due to the base effect, a 0.3% rise in the core rate would leave the year-over-year rate unchanged at 3.1%. When the Fed cut rates by 50 bp in September 2024, headline CPI had been falling for several months. It peaked in March 2024 at 3.5% and fell to 2.5% in August.

EURO: The euro recorded the session low yesterday around the time of the first new reports of Poland shooting down Russian drones in its airspace, slightly below $1.1685. Poland invoked Article 4 of the NATO treaty, which entails consultation. The high was recorded near $1.1730 toward the end of its session. Despite the nearly half-cent range, it was not a trending session, and the euro settled little changed on the day. It is pinned near yesterday's low and has spent little time above $1.1700. It is slipping through yesterday's low in Europe. A break of $1.1650 weaken the near-term technical outlook. The ECB meets today, but there is practically no chance of a change in policy. Nor should President Lagarde be expected to provide much in the way of forward guidance. She may be asked about the widening of the French premium, but she will likely explain that the ECB has the means to address it if necessary to ensure the transmission of monetary policy. The ECB's staff will update its forecasts from June. Then it had GDP growing 0.9% this year, 1.1% next year, and 1.3% in 2027. Given 0,6% growth in Q1 and 0.1% in Q2, the 0.9% forecast for this year means faint growth impulse in the second half of this year. Its CPI forecast in June was for 2.0% this year, 1.6% next, and 2.0% in 2027. 

CNY: The dollar's low against the offshore yuan was recorded yesterday around an hour before the euro's low, slightly below CNH7.1140. It recovered in the European morning to almost CNH7.12, which was extended ahead of the US PPI to around CNH7.1225. The soft PPI and broader dollar selling saw pull back to CNH7.1150. The year's low was set on Tuesday near CNH7.1135. It has forged a three-day base around there and is near CNH7.1235-40 in late European morning turnover. On the other hand, the dollar recorded the low for the year yesterday against the onshore yuan, slightly below CNY7.12, even though yesterday's dollar fix (CNY7.1062) was above Tuesday's low fix for the year (CNY7.1008). The greenback recorded a marginal new low for the year today near CNY7.1175. Today, the PBOC set the dollar's reference rate at CNY7.1034 today. 

JPY: Outside of a flurry of activity after the US PPI, the dollar flatlined against the yen yesterday and was mostly confined to a tight JPY147.25-45 range most of the North American session. The dollar came back bid today and is pushing toward JPY148 in the European morning. If US yields firm after the CPI, the greenback can rise toward JPY148.50. Japan reported 0.2% slippage in producer prices last month, but it still equates with an increase in the year-over-year rate to 2.7% from 2.5%. It did not impact expectations for the Bank of Japan. It meets next on September 18-19, and there is also little chance of a hike. When everything is said and done, the swaps market has 15.5 bp of tightening discounted by the end of the year. It was almost 17 bp at the end of August and 18 bp at the end of July.

GBP: Sterling peaked yesterday after the US PPI near $1.3565. It retried it toward the end of the European session and when it held, it appeared some late longs took profits. Sterling fell to around $1.3530. It settled a little below Monday's close (~$1.3545), which matched the highest close since August 15. The losses were extended to a little through $1.3500 today and a break of the $1.3490 area could spur losses toward $1.3460. The UK reports July GDP tomorrow. It is expected to be flat after 0.4% growth in June (and -0.1% contractions in April and May). Industrial output and services look flat, and a smaller trade deficit may offset the impact of weak construction. The Bank of England meets next week, and like the ECB today, there is practically no chance of a change in policy.

CAD: The US dollar has been gradually edging higher against the Canadian dollar. It recorded a new high for the month yesterday near CAD1.3865 and extended it to CAD1.3890 today. It has the makings for the fourth consecutive session of higher lows and higher highs. It is off a little more than 1% this month. The next technical target is the CAD1.3925 area, but there may be potential toward CAD1.40 in the near-term.  

AUD: We have noted the strong correlation between changes in the Australian dollar and Canadian dollar. The 30-day inverse correlation of the exchange rates was hovering near the year's low (-0.85) for the last few weeks. It has weakened to around -0.75, which has not been seen since late July. The Australian dollar reached a new high for the year yesterday near $0.6635. Although it remained firm, it settled a little below the previous high for the year, recorded July 24 near $0.6625. Still, it was the third session in the past four that it gained more than 0.50%. It is consolidating with a heavier tone today. It may take a break of $0.6580 to boost the odds that a near-term top is in place. 

MXN:  The dollar fell to a 2 1/2 week low against the Mexican peso yesterday near MXN18.5660. It posted the lowest settlement in a month. The low for the year was seen on August 13 around MXN18.51. The greenback is firmer today and near the five-day moving average (~MXN18.6475), which it has not closed above this week. A few Latam currencies did even better, including the Brazilian real, Chilean peso, and Peruvian sol, which were the three best emerging market currencies. Mexico reports July industrial production figures today, and the median in Bloomberg's survey projects a 0.2% decline after a 0.1% decline in June. We already know that auto production, which is about a fifth of overall industrial output, fell by about 14.3% (which looks largely seasonal, and it rose by a little more than 13% last month. 

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