US recap: EUR/USD overcomes PMI problems en route to marginal gains

Oct 24 (Reuters) – The dollar index gained 0.18% on Monday, mostly due to the USD/JPY rebounding from another round of suspected Japanese intervention and sterling slipping despite less political instability.

But euro zone nZRN005DP0, UK and US flash October PMI reports featured increasing stagflation, with recession and inflation risks rising simultaneously.

EUR/USD held onto gains of 0.1% after earlier trading up to 0.9899, its highest since Nov. 6, on follow-through risk-on flows from Friday, aided somewhat by tumbling gilts yields weighing on euro zone and US yields.

Gilts yields out to 10-years tumbled nearly 30bp in anticipation of ex-finance minister Rishi Sunak’s Tory leadership victory, which leaves him on a path to become Britain’s next prime minister.

His reputation for fiscal restraint helped gilts rise, because a less expansive fiscal policy in tandem with sharp BoE tightening reduces inflation expectations, but it may also increase recession risk.

The UK’s service sector contracted for the first time in 20 months. Thus, tumbling yields may no longer be supportive for sterling as the gilts yield premia versus Treasurys and bunds from late September has evaporated.

For the oversold dollar to reverse its Fed-led uptrend, top-tier US inflation, growth and labor data would have to signal a clearer pivot from Fed hikes to eventual rate cuts next year.

The S&P Global PMI data has bearishly diverged from the more heavily traded ISM reports, limiting the impact of Monday’s report.

The recent retreat in European nat gas prices toward June’s lows offers the euro some offset from the war in Ukraine, that now include Russia’s “dirty bomb” warnings amid a pitched battle for the highly strategic Kherson province.

USD/JPY gained 0.79%, with suspected Japanese intervention dips still being bought, but another run above 150 seemingly being guarded against by the MoF.

USD/CNH’s risk-off 1.3% rise after the Communist Party’s 20th Congress ended left the Australian dollar and other China-related currencies down sharply as well.

Tuesday brings German Ifo, US house prices and consumer confidence.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)