FX daily: Data back in the driver’s seat this week

Markets will look for fresh evidence of a hot US economy from this week as September figures start to flow in. Upside surprises in jobs data could take rate hike pricing for the October FOMC above 20bp. It’s not our baseline though, and we expect some stabilisation with modest downside risks for USD in the coming days. We expect a hawkish hike by the RBA tomorrow.

USD: Some tiredness in the rally?

Data could re-emerge as a primary driver for the dollar this week. After a good dose of hawkish Fedspeak and Brent staying supported above $100/bbl, markets now need fresh evidence of US economic strength to solidify expectations of a 28 October rate hike. Pricing is currently 16bp, and peaked at 19bp last week.

The August CPI report on 14 October will be the most important release, but Friday’s jobs figures have the potential to take October rate hike pricing above 20bp. We expect a consensus 90k for September payrolls, but see risks of downward revisions to August’s blowout 162k print. Overall, we expect this week’s labour market data, including ADP and JOLTS, to leave markets guessing about an October hike while keeping the implied probability above 50%. August PCE, released on Wednesday, is the other key highlight of the week, although it should have a more limited impact than the jobs figures.

Barring another significant upside surprise in payrolls, we don’t see the dollar keeping up with its recent strong momentum. While it might be too early for a break lower in oil prices, news of the US and Iran working on a deal regarding the Strait of Hormuz could prevent another jump higher. That can ultimately stabilise bonds and risk sentiment.

The dollar has been looking a bit expensive across G10 according to our short-term valuation models, and we see risks as balanced for USD this week. Dollar bulls may be content with DXY holding around 101.0 for now, but risks are of a pullback to 100.50, more coherent with fundamentals.

EUR: Inflation week

Our models still suggest EUR/USD should be trading above 1.140. Clearly, the latest moves in bond markets, equities and oil all suggest against aggressively bucking the dollar uptrend. But we feel this week could bring some stabilisation after a decline that looks a bit overdone.

The highlight of the week in the eurozone is inflation data for September. Country releases start tomorrow with Spain, and eurozone-wide numbers are due Friday. Headline CPI should accelerate on energy prices, but we expect core inflation to inch only 0.1ppt higher to 2.5%, confirming there’s no sign of second-round effects.

Still, we doubt that will be enough to drive the European Central Bank to a more dovish stance. Policymakers still seem to prefer keeping market pricing hawkish as long as energy prices remain elevated. The closer we get to the October meeting, the more impactful ECB speakers can be on markets. With data not exactly screaming for another hike just yet, pricing relies significantly on short-term guidance.

Today, we’ll hear from President Christine Lagarde, and from many other ECB officials during the week. We have a preference for EUR/USD to inch back higher and stabilise just above 1.140, but we aren’t blind to the lingering downside risks. Among those are French bonds, where another round of spread widening can start to become noticeable in FX.

AUD: Hawkish hike by RBA

The Reserve Bank of Australia announces its policy decision at 05:30am BST tomorrow, and we expect a 25bp rate hike to 4.60% (full preview here). Markets are fully pricing in the move, and consensus is unanimously calling for it. That means the Australian dollar's reaction will be heavily dependent on whether Governor Michele Bullock will leave the door open for more hikes. We think she will.

That’s because inflation concerns remain elevated, and even if crude prices decline, domestic fuel prices are set to remain sticky for longer. Core CPI measures have all remained hot, the labour market is tight, and growth has proven stronger than expected.

We therefore expect markets to retain expectations for further tightening after the meeting, offering support to AUD. We still expect AUD/USD to return to 0.720 by year-end.

CEE: Global headwinds keep currencies on the back foot

After trading closed on Friday, S&P revised the outlook on the Czech Republic's AA- rating from stable to positive. Given current market conditions, we expect the market impact to be limited. Over the weekend, Czech and Hungarian central bankers also spoke. Czech National Bank Deputy Governor Eva Zamrazilova reiterated that the November decision would be between keeping rates unchanged and raising them. National Bank of Hungary Deputy Governor Zoltan Kurali said a credible fiscal path, due to be presented shortly by the government, should lower the country’s risk premium and support rating upgrades, creating a “different environment”.

As the month draws to a close, the CEE calendar is relatively light. Hungary's Government Debt Management Agency is expected to update its funding strategy today. On Wednesday, Hungary will release PPI data, the Czech Republic its final GDP figures, and Poland its key September inflation reading. We expect Polish inflation to rise from 3.4% to 4.2%, mainly due to higher fuel prices, while inflation excluding fuel remains subdued and core inflation edges up to 3.4%. CEE PMI data will follow on Thursday.

The global backdrop remains the main driver and, as last week, risks are tilted against CEE currencies. A stronger US dollar, higher fuel prices, and rising core rates are regional headwinds, although a sell-off in local rates should limit FX depreciation. Overall, we remain bearish and expect the zloty to underperform its CEE peers, reflecting the region’s highest inflation and a dovish central bank.

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