FX Daily: Why the US CPI may be a non-event

Today’s US CPI for September ends a long drought of hard data due to the shutdown. But we don’t expect it to generate a material pick-up in FX volatility. Our call for core CPI is 0.3% MoM and 3.2% YoY – very close to the consensus 0.3%/3.1%. For headline CPI, we are fully aligned with the consensus 0.4% MoM/3.1% YoY.

Despite tariff-led price pressure in some sectors, there are indications that airfares, hospitality and housing should be a drag on the CPI basket. With headline and core close to 3.0%, the Fed can cut and signal more easing ahead when it meets next week. But markets are fully pricing in 50bp by year-end, and without any jobs data at hand, it will be hard to speculate much beyond the December meeting.

A potentially more impactful development for FX is the ongoing commodity spillover of US sanctions on Russian oil producers. A few reports now suggest some Indian and Chinese refineries are considering halting imports of Russian oil. A meaningful reduction in Russian oil supply (which we didn’t see after previous sanctions) could drive Brent prices back to the 70-75$ range.

These are levels that would drive some noticeable dollar appreciation. So far, the FX impact of the oil price spike has been particularly visible in a Norwegian krone rally and added pressure on the yen, which incidentally keeps discounting domestic risks.

Francesco Pesole

Our call throughout this week has been that a clear break below 1.160 in EUR/USD would likely have required to be backed by some hawkish repricing of the USD curve. As discussed above, we expect a consensus US CPI print today, which should have a neutral effect on USD.

The two alternative drivers for a move into the 1.15 area would be a further rally in oil prices or some materially soft eurozone data. Eurozone PMIs for October – released today – are, however, expected to show further stabilisation above the 50-expansion cutoff level, despite some expectations for slightly softer German numbers.

The downside risks for EUR/USD have increased a bit due to the possibility of further oil rallies, but for now we expect 1.160 to continue being the short-term anchor.

Francesco Pesole

The loonie came under some pressure overnight after Trump announced he’s ending all trade negotiations as retaliation for an Ontario-sponsored anti-tariff ad. Some might be surprised by the relatively small (0.2%) jump in USD/CAD on the news, but in reality there had been little to no progress on US-Canada trade talks so far, and the pair was already trading at over 2% short-term overvaluation (in our short-term fair value estimate) before Trump’s post.

But if anything, we think that this development slightly increases the chance of another Bank of Canada rate cut next week. As discussed in our preview, we expect a 25bp reduction, broadly in line with consensus and market pricing (18bp), as trade uncertainty and existing US tariffs are weighing heavily on Canadian businesses’ investment and hiring plans. The worrisome picture for activity and jobs should, in our view, prevail over hotter-than-expected September inflation numbers and convince the BoC to cut again.

We also think it’ll be hard for the BoC to close the door on more easing already, which should keep the Canadian dollar weak in the crosses. USD/CAD faces upside risks in the near term, where explorations above 1.410 remain very much possible. But by year-end, we still think USD weakness can drag the pair back towards 1.38.

Francesco Pesole

Today's calendar can only offer consumer confidence in the Czech Republic, where we saw some rebound in September. Otherwise, more stories are happening in the region outside the usual calendar.

In Turkey, the central bank decided yesterday to cut rates by 100bp to 39.50%, which was roughly in line with market expectations; however this time the spectrum of options on the table was broad. For the market, this is news that the central bank continues the cutting cycle despite hawkish forward guidance. Even so, we do not know much about the size of further rate cuts after yesterday's meeting and the next two inflation prints will be decisive. The CBT inflation report in two weeks may also tell us something. Today, we will watch a court hearing regarding the congress of the opposition CHP party. The market has taken a cautious approach, and it seems that the risk is more on the positive side for now, and we could see some market relief.

On the political side, the topic of the carbon emission trading system (ETS2) is opening up, where we see pushback, especially from the Czech Republic and Poland, where we currently see the most vocal central banks warning about the impact on inflation in 2027 (from 0.6 to 2.0pp). Yesterday's headlines suggest that we will see some changes to this system with the aim of reducing the impact on households and inflation. Therefore, we could see some details in the coming days. A potential reduction in the impact would mean a fall in inflation risks for the CNB and NBP and some room for a dovish shift in communication.

Chris Turner