FOREX: USD Index at 2-Month Lows, Technical Backdrop Deteriorating

Wednesday's Europe rates/bond options flow included:

• OEG5 116.50/117.00/117.50c fly, bought for 10.5 in 3k
• RXH5 132.5/133.5/134 broken call fly, bought for 11 in 2k
• RXH5 133c, boought for 30.5 in 9k vs 1.62k at 130.65
• RXH5 131.50/132.50cs, bought for 17.5 in 3k
• ERJ5 97.3125p vs ERM5 97.4375p, sold the June at 2.5 in 4k
• ERM5 97.62/97.75/97.87c fly, bought for 2.25 in 8.88k
• SFIK5 95.45/95.60cs, bought for 10.25 in 3k
• SFIM5 95.70/95.85/96.00c fly, bought for 2.75 in 6k
• SFIU5 96.00/96.35/96.70 call fly vs. SFIM5 95.55 puts, paper paid -1.5 for the fly on 7K.
• SFIU5 95.85/96.00cs vs 95.50/95.35ps, bought the cs for 1.5 in 9k total

• Despite a dovish repricing in the U.S. short end on the back of the slightly softer-than-expected round of core and supercore CPI data, moves in the US dollar have been less clear cut, with the USD index only marginally lower on the day.
• Some major pairs saw sharp intra-day reversals, emphasised by EURUSD declining on the session as we approach the APAC crossover. Initially, the pair rose to 1.0354 on the broad based greenback selling, however, gradual declines since picked up momentum through the pre-data levels of 1.0300, briefly trading down to a 1.0260 low before stabilising around 1.0290 at typing.
• A clearer theme on Wednesday has been the outperformance of the Japanese Yen, as lower core yields and BOJ rhetoric have boosted local FX sentiment. USDJPY has declined 0.92% at typing and is around 160 pips off earlier session highs, having briefly tested below 156.00 in the aftermath of the US data.
• As a reminder, headlines from BoJ Governor Ueda crossed overnight, reiterating that a decision on whether to raise rates will be made next week (so largely echoing Deputy Governor Himino's remarks from yesterday). The probability for a hike on Jan 24 has now risen to around 70%. A sustained breach of 156.02 (Dec 31 low), would target a deeper correction to 154.71, the 50-day EMA.
• GBP volatility has also been a key feature of Wednesday’s session, following the lower-than-expected UK CPI data in early European trade. While sterling initially traded weaker on the release (GBPUSD down to a 1.2163 low), the potentially good news for the UK economy and the fact the downside surprise was mostly driven by volatile components assisted a sterling recovery, which was exacerbated by the US data, prompting an impressive recovery to 1.2306. The pair has since slipped back to 1.2225. Similar price action for EURGBP sew the cross slip back towards the 0.84 handle, after printing fresh four-month highs at 0.8463 earlier in the session.
• Australian employment data is due overnight before UK GDP on Thursday. US retail sales and jobless claims headlines the US economic calendar.

Looking at final state-level data released after the preliminary national print from January 6, MNI projects German national-level final December CPI was unrevised at 2.6% Y/Y and 0.4% M/M.

• There is somewhat elevated uncertainty for the final national release on the back of: 

  • a) limited details from the individual states as of the preliminary print on January 6,
  • b) a 0.2pp downward revision of the Bavaria December Y/Y figure for their final print, and
  • c) the fact that Destatis had to issue a correction of the national level December HICP from 2.9% to the current 2.8% Y/Y.