US recap: EUR/USD rally hits near-term crescendo on soft US PPI

Nov 15 (Reuters) – The dollar index firmed on Tuesday, rallying back sharply from a three-month low as risk sentiment deteriorated rapidly late in the session after Russia-Ukraine concerns vaulted back to the forefront of investors’ worries.

A senior US intelligence official said Russian missiles crossed into Poland, killing two people, the Associated Press reported. Reuters could not immediately confirm the information.

Polish Prime Minister Mateusz Morawiecki has called an urgent meeting of a government committee for national security and defense affairs, the government spokesman said on Twitter. Russia rained missiles on cities across Ukraine on Tuesday after its withdrawal from Kherson.

The afternoon price action reversed much of the earlier trends that followed well-below-forecast US PPI readings, which had sent Treasury yields lower and stocks higher.

Following last Thursday’s disinflationary CPI report the terminal fed funds rate has settled around 4.9% — from above 5% at its peak — while futures also project a switch to rate cuts in the second half of 2023, with nearly two reductions of 25bp priced in.

Most Fed speakers maintained the need to keep hiking rates, albeit smaller than the preceding four 75bp moves, with a data-dependent plateau after that to make certain inflation is retreating toward the long-term 2% objective.

EUR/USD was flat after retreating well back from its earlier 1.0481 four-month high on EBS that overtook the 200-day moving average at 1.0429, but then faltered ahead of the 50% Fibo of 2022’s range by 1.0500. The late drop sent prices to new Tuesday lows.

With IMM specs already well net long EUR/USD before the softer US inflation data boosted prices, it doesn’t have the short squeeze fodder that has helped accelerate yen and sterling recoveries against the dollar.

But EUR/USD’s pandemic downtrend has clearly been reversed and a near-term corrective pullback should precede a broader recovery toward resistance near 1.08.

Sterling rose 0.8% after slipping from its post-PPI spike and 3-month high at 1.2026 that was capped near the 50% Fibo of this year’s implosion.

UK jobs data were somewhat disappointing ahead of Wednesday’s CPI report and Thursday’s autumn statement that’s seen restoring fiscal policy confidence lost after the ill-fated mini-budget in September.

USD/JPY fell 0.48%, having recovered from of its post-PPI slide to 137.665 that briefly breached daily cloud base support at 138.15. But upside is capped by the cresting 100-DMA at 140.86.

US retail sales, IP and NAHB are out Wednesday to sway Fed expectations.

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