Global FX Strategy/CITI’S TAKE
Despite turning more neutral USD in our forecasts, we have viewed the asymmetry into data as USD-positive as markets price risk of a more hawkish Fed. We think this setup persists into US CPI, particularly with the leveraged segment short USD, and another set of NFP/CPI prints before next FOMC meeting. But the shelf life on this asymmetry is running out, in our view, and could expire if disinflation continues next month.
We’ve articulated a more neutral medium-term USD view, but one in which the asymmetry skewed USD-positive. That is, we’ve maintained the market would be more sensitive to US data beats than misses, and more sensitive to inflation than labor market data. Friday’s jobs report validates this, in our view, as the softer NFP print was not enough to materially change Fed expectations (e.g. September FOMC pricing only fell 1-2bps and remains close to 50/50 for a hike).
We think the setup still skews USD-positive ahead of CPI. Consensus expectations are for a 0.2% MoM core CPI print (in line with Citi Economics, though they see risk of a 0.1%). An in line number could see a marginally weaker USD, but it would take a material repricing of September FOMC odds, in our view, to see sustained follow-through. Even on a miss, we think the market will still carry some premium for hikes in the Fed curve, given the FOMC’s reaction function. A beat, on the other hand, should keep a September hike live, which we would expect to have more follow-through given USD valuation and leveraged positioning (Figures 1 & 2). To reflect this setup, we still hold our short EURUSD (spot ref 1.1548 at 11:29am ET) and long USDJPY (spot ref 158.92 at 11:29am ET) positions into the data.
But we’ve noted this asymmetry has a shelf-life, and CPI could mark the beginning of the end. In other words, while the asymmetry around the data has leaned hawkish, our modal expectation has leaned dovish. Each data print that doesn’t alter the disinflation narrative shifts the onus for a hawkish Fed onto the next set of data. While the FOMC will receive another set of NFP/CPI prints before its next meeting, there is no strong reason (in our view) to expect that next set of data will justify a September rate hike, particularly if CPI doesn’t beat this week. Such an outcome could quickly see that Fed premium come out of the curve following the August data (released September), all else equal. For now, though, we stay focused on this week’s data.
Should we see a weaker USD outcome, EURUSD could squeeze up towards the 1.1620-1.1630 area, where the 200dma and last high in the downtrend converge. A strong USD reaction will initially find support around 1.1480-1.15 (pivotal levels all summer and breakout area after the July FOMC), though ultimately a world in which the Fed actually hikes in September should see EURUSD below 1.14 in our view.
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