Asian FX Close: Dollar holding steady ahead of the Core PCE

Themes

The Dollar is on a holding pattern ahead of the Core PCE data: The May Core PCE which is the Fed's favored inflation data will be released later tonight and is expected to show little, if any increase, the first time that would be the case since November 2023. But even more importantly, when stripping out volatile food and energy prices, the Core index which draws even closer scrutiny from Fed policymakers, is set to indicate its lowest annual reading since March 2021. If that date rings a bell, it's when core PCE first passed the Fed's coveted 2% inflation target to 2.26% during this cycle. According to a BBG median, the Core PCE is forecast to rise 0.1% m/m against 0.2% prior while the y/y is forecast to come in at 2.6% from 2.8% prior. Should the Core PCE data come in as expected, the Fed will breathe a sigh of relief but unlikely to declare victory over inflation yet. Be prepared for fireworks later tonight as the Dollar Bulls will charge forward if the data comes in hotter than expected while Dollar Bears will sharpen their claws if it is cooler.

FOMC-dated OIS now in cumulative rate cuts of 43bps through calendar '24 is up a tad from yesterday's 43bps, though still pointing to ~85% odds of a second 25bp rate hike by the end of the year. US 10-year Treasury yields slid 3bps to 4.29%.

USD/JPY blew past the 161.00 handle to a fresh 37-year high of 161.27 this morning as traders threw caution to the wind on any intervention by the Japanese authorities. FinMin Suzuki ramped up his rhetoric but it is something that we have not heard before. The Minister said he won't comment on forex levels and currencies need to move stably reflecting fundamentals and that rapid FX moves are undesirable. He is also deeply concerned about excessive, one-sided moves on forex and they are closely watching FX moves with a high sense of urgency. The rhetoric this morning from the Japanese officials is not convincing to stop the beleaguered currency from sliding further with the market now looking for the pair to climb towards the 165.00 handle and beyond. The pair is likely to trade close to the 161.00 handle as it awaits the release of the Core PCE data later tonight. See USD/JPY Tech for trading strategies

EUR/USD traded within tight ranges this session between 1.0685 to 1.0711 as market participants await the release of the US Core PCE data later tonight. A hotter-than-expected number will send the pair sliding down while a cooler number will see a test of resistance at 1.0740. Some EU data yesterday did not help the single currency's cause as Eurozone industry confidence fell from -9.9 to -10.1. Services confidence fell from 6.8 to 6.5. Consumer confidence improved slightly from -14.3 to -14.0. Retail trade confidence fell from -6.8 to -7.8. Construction confidence fell from -6.2 to -7.0. However, all eyes will be on the French elections this Sunday where Marine Le Pen's far-right party has been gaining traction raising concerns of a not-so-friendly business environment. Investor confidence will be greatly affected should she win the election this Sunday. See EUR/USD Tech for direction

AUD/USD traded on the back foot since the start of the session hitting a low of 0.6620 despite the PBoC fixing of USD/CNY slightly lower at 7.1268 from yesterday's 7.1270 level. It seems as though the market has forgotten the release of a much hotter-than-expected Australian May CPI which came in at 4% y/y against the consensus of 3.8% with the trimmed mean accelerating to 4.4% y/y against 4.1% prior which had given the Aussie a prop. RBA Deputy Governor Andrew Hauser emphasized the need for comprehensive analysis before making policy decisions, stating, It would be a bad mistake to set policy based on one number and we don t intend to do that. His comments dampened the recent optimism of the AussieBulls following the data. The pair will trade with a slightly negative bias ahead of a slew of the US Core PCE data later tonight.

NZD/USD initially rose to a session high of 0.6092 in early Australasian trade but gave back all its gains and more in tandem with its Aussie cousin, which was sold down quite aggressively by importers and a leveraged account. Yesterday's NZ ANZ Business Confidence which fell from 11.2 to 6.1 in June knocked overall confidence. Cost expectations decreased from 72.6 to 69.2, while pricing intentions dropped significantly from 41.6 to 35.3, signaling lower price pressures in the business environment. Furthermore, inflation expectations continued their steady descent, moving from 3.59% to 3.46%. ANZ noted that the economy is weak, as the RBNZ intended. More importantly, there appears to be renewed meaningful progress on bringing down inflationary pressures. This fosters optimism that RBNZ might be able to lower the Official Cash Rate considerably earlier than the currently projected August next year. This will limit the pair's upside rallies above the 0.6100 handle and ought to be sold. See NZD/USD Tech for trading ideas

Elsewhere......

WTI and Brent rose along with geopolitical tensions: Oil futures settled higher on Thursday on worries that global crude supply may be disrupted as geopolitical pressure in the Middle East and Europe mounted, although prices were tempered by a surprise increase in U.S. crude and gasoline inventories. However, the war drums have gotten louder in Lebanon prompting the US to evacuate its citizens which will keep crude oil prices elevated. Brent Aug oil futures rose $1.14 or 1.34% to settle at $86.39/bbl and the U.S. West Texas Intermediate crude futures rose 84 cents or 1.04% to $81.74/bbl.

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