FOREX: EUR and JPY Slide on Political Risks, USD Main Beneficiary
- The EUR is weaker in early Europe, following the resignation of the French PM Lecornu - and bedding markets in for an extended period of political risk and budget brinkmanship. French equities also see weakness - with the CAC40 easily the underperformer in Europe. Next major support in EURUSD crosses at 1.1646, the late Sept low. Weakness through here snaps the weak uptrend posted off the August 1st low.
- Lecornu's resignation opening up more criticism from other parties: National Rally's Bardella says the government have shown they have understood
"nothing" regarding the country's problems. - Meanwhile, the JPY is lower against all others in G10, helping trigger a new all-time high for EURJPY, after the surprise victory of Takaichi in the LDP leadership race. This was no doubt a surprise to the market given market odds, with most bettors favouring Koizumi winning the race. An extraordinary session of the Diet will be held around Oct to choose a new PM.
- Takaichi's policy bias around pro-fiscal policy may mean the coalition could expand to incorporate more like-minded parties, and she is expected to focus on cash handouts and tax rebates for households to reduce cost of living pressures. While she toned down her criticism of the BoJ during the leadership campaign, her well known views around BoJ rate hikes (she previously deemed them "stupid") is weighing on the currency. USD/JPY rallied to touch 150.44, paving the way for a test of the key medium-term resistance at 150.92, the Aug 1 high. A break of this hurdle would confirm a resumption of the bull leg that started Apr 22. Today's intraday low at 149.05 is the first support.
- The US government remains in shutdown, leaving official data on the sidelines for now. As such, market focus remains on central bank speak. ECB members due today include ECB's Escriva & Lagarde, Fed's Schmid and BoE's Bailey.
Want to read more?
Find more articles and bullets on these widgets:
Historical bullets
LOOK AHEAD: US Macro: PPI (Wed) and CPI (Thu) Inflation
US PPI inflation is released on Wednesday before CPI inflation on Thursday, an unusual ordering that should see core PCE implications dialled in after the CPI release rather than the usual wide range waiting for specific PPI details. PPI will be watched more closely than usual this month after a far stronger than expected jump in last month’s July report fired a warning short over tariff-based cost pressures starting to feed through. That included a 0.6% M/M increase in our preferred core series of PPI ex food, energy & trade services, which strips out items such as the then booming portfolio management & investment advice category following the strength in equity markets. It's too early to gauge an accurate sense of analyst expectations for August.
CPI inflation on Thursday will then be the last major release ahead of the Sep 17 FOMC decision. Consensus looks for core CPI at 0.3% M/M after the 0.32% M/M in July, another monthly increase comfortably above a pace consistent with 2% inflation. August should in theory start to see the largest tariff impacts along with September and possibly October. Returning to July’s report, core goods inflation was softer than expected, at a still solid (by core goods standards) 0.2% M/M for a second month running but about half that of 0.4% expected by analysts. Instead, non-housing core services surprised higher. The latter was a “dangerous” development in the words of a usually dovish Chicago Fed’s Goolsbee (’25 voter), who speaking after Friday’s payrolls report is still undecided on a September cut whilst looking for August inflation data “to get more information”.
LOOK AHEAD: US Macro: Payrolls Preliminary Benchmark Revisions (Tue)
- The BLS on Tuesday will publish preliminary estimates of benchmark revisions, based off QCEW data for Q1.
- These will give an indication of the actual benchmark revisions on the Mar 2025 level of payrolls due with the Jan 2026 payrolls report released in early February.
- Bear in mind that the final benchmark estimate tends to nearly always be more negative than the preliminary figure – see historical values to the right.
- That doesn’t mean they can’t be large again after last year’s historically negative revision that lowered the level of payrolls by ~600k. Initial estimates we’ve seen look for another large downward revision, with the smallest being worth -550k but with wide ranges higher.
FED: Barclays Adds A Cut To 2025 Fed View
Barclays analysts now expect three Fed cuts in the remainder of the year, adding October to their pre-existing call for 25bp reductions in September and December. "Given the disappointing August employment report, we expect the FOMC to see more elevated downside risks to the employment side of the mandate."
- As for a 50bp September cut, "we think that the FOMC will view [that] as sending too strong a signal that labor market conditions are deteriorating. Indeed, we think that participants such as Powell understand that the slower pace of payroll employment reflects at least, in part, slower labor supply, which does not translate into increased labor market slack."
- For 2026 they continue to expect 25bp cuts in March and June to 3.00-3.25%, but "we do not think the FOMC will be able to cut rates more than twice next year, as we think that activity will show some slight acceleration, with the economy adapting to the new tariff environment and fiscal policy providing some support, and the unemployment rate will revert down amid limited increase in labor supply."
