US
USD is firmer against all major currencies ahead of the US August CPI data (1:30pm London, 8:30am New York). Headline CPI is seen at 2.9% y/y vs. 2.7% in July and core is expected at 3.1% y/y vs. 3.1% in July. Watch-out for super core services (less housing), a good indicator of underlying inflation trends. In July, this measure rose 0.2pts to a five-month high at 3.2% y/y and signaled that progress towards the Fed’s 2% inflation goal is stalling.
The unexpected softness in the US August PPI, driven by trade services, could translate into a weak CPI print. Trade services PPI (measure changes in margins received by wholesalers and retailers) dropped to a nine-month low at 2.9% y/y vs. 5.9% in July, suggesting business are absorbing costs rather than passing them on to consumers.
Bottom line: softer CPI inflation will lift Fed funds rate cut bets against USD. In contrast, stronger CPI inflation will raise risk the US economy enters a period of stagflation and can also weigh on USD.
EUROZONE
EUR/USD is trading heavy under 1.1700. The ECB is widely expected to keep the policy rate unchanged at 2.00% for a third consecutive meeting (1:15pm London, 8:15am New York). Eurozone inflation remains close to the 2% target and real GDP growth is tracking the ECB’s 2025 forecast of 0.9%. Real GDP rose 0.6% q/q and 0.1% q/q in Q1 and Q2, respectively. The ECB’s updated macroeconomic projections and President Christine Lagarde’s post-meeting press conference will be key for policy insights.
The swaps market price-in 75% odds of a 25bps cut in the next 12 months. In our view, the ECB is well-positioned to keep rates steady for an extended period while the Fed cuts rates. Bottom line: relative monetary policy stance underpins the EUR/USD uptrend.
NEW ZEALAND
NZD/USD is trading on the defensive on broad USD strength. RBNZ Governor Christian Hawkesby sticks to the bank’s dovish script. Hawkesby stressed that “While our central projection for the OCR is to fall to around 2.50% by the end of the year, that could occur faster or slower depending on how the economic recovery evolves.”
The next RBNZ meeting is on October 8, and markets price-in nearly 90% odds of a 25bps cut and a total of 50bps of easing by year-end to 2.50%. Regardless, NZD/USD can edge higher supported by resilient global economic activity and a dovish Fed policy stance.
TURKEY
Turkey central bank (CBRT) is expected to slash rates 200bps to 41.00% (12:00pm London, 7:00am New York). The CBRT kept the policy rate unchanged in June and lowered it 300bps at its last July meeting “in view of the decline in the underlying trend of inflation.” The disinflation process is ongoing and argues for a less restrictive policy stance. Core CPI inflation slowed to 33% y/y in August, the lowest since December 2021. Similarly, headline CPI inflation eased to 32.95% y/y in August, the lowest since November 2021 and is on track to fall within the bank’s forecast range between 25% and 29% by end of 2025. Over the next three months, the swaps market is pricing in 600bps of easing.
PERU
Peru central bank (BCRP) is expected to resume easing and cut the policy rate 25bps to 4.25%, but only by a whisker (midnight London, 7:00pm New York). 8 of the 15 analysts polled by Bloomberg have a 25bps cut penciled-in, the rest see no change. Subdued inflation in Peru (inflation remains at lower band of the 1 to 3% target range) supports the case for a rate cut.
