Forex
Dollar stable ahead of PCE data; euro edges higher, yen slips
Investing.com – The U.S. dollar steadied in early European trade Friday ahead of the release of key inflation data, the euro edged higher while the Japanese yen slipped slightly but remained on course for its strongest week in three months.
At 04:00 ET (09:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded largely unchanged at 104.127.
Dollar looks to PCE release
The dollar found some support from data showing the expanded faster than expected and inflation slowed in the second quarter.
The reading pushed up hopes that the U.S. economy was headed for a soft landing, where growth will remain steady while inflation eases.
However, the dollar gains were limited, with U.S. macro not the only driver in the foreign exchange markets these days.
“The fallout of the tech sell-off, frontloaded US election positioning, and the unwinding of carry trades have generated moves large enough in magnitude to out shadow U.S. data,” said analysts at ING, in a note.
That said, the focus Friday is now squarely on data, due later in the session, which is expected to show inflation eased further in June, keeping intact expectations for a September cut.
Euro drifts higher
In Europe, edged marginally higher to 1.0845, after data showed that consumers in the eurozone stopped reducing their inflation expectations in June after four consecutive monthly falls.
The ECB’s Consumer Expectations Survey showed the median consumer expected inflation to average 2.8% over the next 12 months, stable from May after a steady fall from 3.3% in January.
The ECB cut interest rates in June and is widely expected to do so again in September, but the policymakers would undoubtedly prefer these expectations to continue to fall as they loosen monetary policy.
traded 0.2% higher at 1.2870, but well below the one-year high of 1.3044 hit last week.
The meets next week, and while markets are anticipating around 50 bps of cuts this year, there remains a great deal of uncertainty over whether the policymakers will agree to rate cut then or delay until September.
Yen looks to next week’s BOJ meeting
In Asia, rose 0.2% to 154.25, with the yen’s recent advance somewhat stalled by soft , which showed inflation remained largely muted in July.
The soft inflation reading came just days before a meeting, with analysts split over whether the central bank will have enough headroom to hike interest rates by 10 basis points.
However, the yen was on track for a 2.5% rise for the week, its biggest weekly gain since late April-early May, after suspected intervention boosted the currency.
rose 0.3% to 7.2520, with the yuan retreating after suspected intervention by the Chinese government saw the currency appreciate sharply against the dollar on Thursday.
Bank of America (BofA) analysts highlighted a shift in market sentiment, identifying long U.S. dollar positions as the most crowded trade, and now a significant headwind for the currency. This perspective aligns with BofA’s recent reports on the U.S. dollar, emphasizing the stark contrast between current market positions and historical trends.
The analysts’ findings indicate a growing apprehension among market participants regarding global inflation, particularly with a re-acceleration anticipated by 2025. Euro Area inflation expectations are notably visible, underscoring the broader concerns about inflationary pressures.
Additionally, while emerging market (EM) investors seem to have discounted the worst-case scenarios related to tariffs, the uptick in sentiment is perceived as tentative. The cautious stance of EM investors reflects the uncertainty and challenges in the global trade environment.
BofA’s analysis suggests that the heavy positioning in favor of the U.S. dollar could be problematic. The report, dated January 14, 2025, points out that the extent of USD long positions is exceptional not only in a historical context but also when compared to the past year’s trends.
Furthermore, the discrepancy between conviction and positioning is evident, as only a fifth of respondents consider long USD their highest conviction trade. This is despite 42% of those surveyed expecting the peak of 10-year U.S. Treasury yields to exceed 5%, as revealed in a separate exhibit from the bank’s research.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Investing.com – Donald Trump’s inauguration is right around the corner, and UBS has advised its clients to go long the pair to hedge policy risks before the big day.
In a light data week, Trump’s inauguration will take center stage next week, according to analysts at UBS, in a note dated Jan. 16.
“While we don’t know what his first moves will be, we doubt it will be to levy big tariffs on day one. But that doesn’t mean markets won’t stop focusing on it. FX markets are not priced for large tariffs. Big tariff moves could still weaken the CNY more meaningfully, hurting pro-growth currencies such as the EUR,” the Swiss bank said.
Given the risks, volatility is likely to increase in the months ahead. Option volatility has already risen, though this is more due to diverging economic growth expectations between the US and the rest of the world and to country- specific issues like those in the UK and Canada. This means any market-negative developments should still lead to higher actual and implied volatility.
USD/CNY has reached new highs of late, trading at the upper limit of the fixing range, the Swiss bank said.
“We expect the yuan to face increased pressure once Trump firms up his tariff plans targeting China, which may lead the People’s Bank of China (PBoC) to permit further depreciation of the currency,” UBS added.
A weaker CNY against the dollar could help mitigate some of the negative impacts of any tariff hikes. Additionally, vulnerable domestic economic fundamentals are likely to weigh on yuan sentiment, contributing to higher FX demand and investment outflows.
“Overall, we like to be long , targeting a move toward 7.50 in the coming which could also provide positive carry of 2.1% p.a. We believe a stop-loss of 7.20 is prudent,” UBS said.
At 09:10 ET (14:10 GMT), USD/CNY traded marginally lower at 7.3289.
UBS revised its inflation forecast for Japan, projecting higher inflation rates in the coming years due to a robust US dollar and increased energy prices.
The UBS FX team adjusted their foreign exchange outlook, now expecting the exchange rate to hit 150 by the end of 2025, up from the previous estimate of 145. This adjustment is based on the backdrop of a strong US dollar.
The revised forecast anticipates a 0.1-0.2 percentage point increase in inflation for 2025 and 2026, driven by higher energy costs and consumer price index (CPI) goods. The core-core CPI, which excludes volatile fresh food and energy prices, is projected to remain above 2% through 2025.
UBS now expects it to reach 2.0% year-over-year at the end of 2025, a slight uptick from the previous estimate of 1.9%. UBS also highlighted that food inflation, currently at 4.2% year-over-year, is expected to stay at similar levels at least through the first half of the current year. This is attributed to the yen’s depreciation and unstable supply conditions.
The research firm notes that while service inflation has been relatively low at 1.5%, particularly due to weak housing rent and public services prices, an acceleration in overall service inflation is anticipated.
However, the development of inflation in specific service components, such as housing rent and public services, which respectively account for 37% and 25% of the weight in services within the inflation calculation, remains uncertain. U
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
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