FX daily: Boring CPI, boring August?

Yesterday’s unexciting US CPI print left FX with little sense of direction into the end-August Jackson Hole Symposium. What can stop this relentless decline in volatility? Gulf news, Fedspeak and big surprises in tier-two data are all possible candidates. But there’s a good chance they won’t, and EUR/USD may stay in tight ranges for the next few weeks.

USD: Markets remain hawkish after CPI

The dollar had a short-lived negative reaction to the spot-on consensus 0.1% headline and 0.2% core month-on-month CPI print yesterday. The driver was a small dovish repricing in Fed rate expectations, which told us that markets were positioned for a slightly hotter print than consensus. In any case, the release did not provide a conclusive answer for front-end rates and FX direction, and the dollar ended the day stronger, perhaps on some net long rebuilding after this round of US data.

In our assessment, core inflation running at a 1.6% three-month annualised is weakening the case for Fed tightening. But markets remain hawkish. The jobs and CPI reports have together knocked 5bp off September FOMC expectations, but 9bp remains in the price. For December, the repricing was -10bp, but a full 25bp hike is still embedded in the curve.

This tells us two important things for FX. First, there is reluctance to price out further Fed tightening, which is keeping dollar bulls active. Hawkish Fed communication is the main culprit. The other factors are a combination of lingering attachment to Warsh’s June price stability commitment, not entirely nullified by the July press conference, and months of strong data before July. Second, there is plenty of downside for front-end USD rates and, by extension, the dollar, if we are right to think the Fed won’t hike.

Anyway, the consensus CPI print was a missed opportunity for FX markets to gain clearer direction ahead of the 27-29 August Jackson Hole Symposium, which still looks very much a ‘live’ event. Next week’s FOMC minutes should offer some insight into the Committee’s latest thinking, but unless we see a major surprise in today’s PPI data or other second-tier releases over the coming weeks, Fed pricing may settle and FX volatility may compress further. Even so, we expect Fed communication to gradually soften its hawkish tone and keep risks on the downside for USD.

In all this, the Gulf situation may regain some relevance for FX, in particular through the risk-sentiment implications of the Strait of Hormuz negotiations.

EUR: Testing the ranges

We retain a preference for EUR/USD upside following the latest US data. That view is rooted in our Fed assessment outlined above, though it must be balanced against the risk that renewed escalation in the Gulf could provide fresh support to the dollar.

Our target for the coming weeks remains 1.160, followed by 1.17 in autumn and 1.18 by year-end. The absence of a clear catalyst, however, may keep EUR/USD range-bound for longer, while vols test recent lows.

We will be watching closely for another test of 1.150. Our bias is that buyers would re-emerge there, potentially nudging the dominant trading range higher to 1.150-1.160.

NOK: Some dovish risks from Norges Bank today

This morning’s Norges Bank meeting carries some downside risks for NOK. In this article, we discuss why we think policymakers will keep rates at 4.25% (in line with expectations), but still expect them to hike rates again later this year. That’s based on our call for an underlying inflation rebound in coming months. Accordingly, we also don’t think they will remove the reference to further tightening from today's statement.

However, we cannot ignore the two benign 2.7% CPI-ATE prints in June and July and how they might tilt the balance to a slightly less hawkish tone. We see little upside room for front-end NOK rates anyway at this stage. Markets are pricing in 27bp of tightening by year-end, broadly in line with our base case, but we have become less convinced about another hike and even less convinced about the prospect of more than one.

That is not a major concern for our bullish NOK views, however. Fundamentals and an attractive carry regardless of another hike, and we remain bullish on the krone with a 10.75 target versus EUR at the end of December.

CEE: Macro tests for the rates repricing

In Poland, the final July CPI release should confirm headline inflation at 3.0% YoY, up from 2.5% in June, mainly on the back of higher gasoline and diesel prices. Our initial estimate points to a pick-up in core inflation from 3.0% to 3.1%, and the detailed basket should show whether the increase was limited to fuels or accompanied by broader price pressure. The flash 2Q26 GDP estimate should show a further acceleration in activity. We forecast growth at 3.8% YoY, up from 3.5% in 1Q26, despite a further slowdown in private consumption. The main offset should come from stronger investment growth, supported by EU-funded projects and a recovery in capital spending.

In Turkey, today’s focus is the CBT inflation report, the first major communication after last week’s decision to keep the one-week repo rate unchanged at 37% and maintain the current liquidity setup. We expect markets to look for any change in the inflation path, the balance of risks and language around the timing of policy normalisation.

In FX, yesterday delivered the expected Czech koruna gains after the spike in rates. EUR/CZK is back in the 24.200-24.250 range, and we still see scope for a move below 24.200. EUR/PLN is lagging slightly, but we also see room for a move lower towards 4.290. EUR/HUF continues to struggle to settle lower, with a lack of positive local drivers for now.

Read the original analysis here