FX volatility has picked up modestly since the start of the month, but remains well below spring and even early August levels. The rise in geopolitical risk in the Middle East (Israel's strike in Qatar) and Europe (Russian drones downed in Poland) has failed to drive any sizeable FX reaction. It appears that markets are not seeing those events as likely to lead to escalations. US data remain the most likely driver of any larger FX volatility shake-up at this stage. August CPI data is released today, and we are aligned with the consensus in expecting a 0.3% MoM core print, ING's FX analyst Francesco Pesole notes.

Risks are skewed to the downside for the USD

"Yesterday, US PPI came in notably subdued, falling -0.1% MoM for both headline and core measures. July’s figures were also revised down by 0.2pp, now showing a 0.7% MoM increase versus the initially reported 0.9%. The key driver was a sharp -1.7% MoM drop in 'trade services' – a proxy for corporate profit margins. This suggests that, for now, firms are absorbing higher input costs linked to tariffs rather than passing them on to consumers."

"This could reflect caution around end-demand prospects or a strategic reluctance to raise prices and risk public or political backlash. Either way, it reinforces confidence that the upcoming CPI print is unlikely to exceed 0.3% MoM, which in our view can help cement bets for three 25bp Fed cuts by year-end. Unless we see a major inflation undershoot today, speculation on a 50bp move next week should remain contained."

"We believe the risks are skewed to the downside for the dollar today, as relatively benign CPI data could give the go-ahead to re-enter USD shorts that might have been partly held back ahead of the release."

Source: Fxstreet