US recap: EUR/USD up on record inflation

Aug 31 (Reuters) – EUR/USD rose on Wednesday as record euro zone inflation nL1N3070JH boosted bets on ECB rate hikes and short-term bund yields, while a below-forecast debut for the revamped ADP let the dollar down.

With 9.1% euro zone inflation favoring further ECB tightening, 2-year bund-Treasury yield spreads added about 6bp to their swift rebound from August’s -2.79% low to their -2.357% high near July’s peak, as month-end flows sapped Treasury yields along with the uncertainty ADP injected ahead of US non-farm payrolls.

EUR/USD was up 0.36%, slightly off its high of 1.0079 on EBS.

The rally stalled below last week’s rebound highs at 1.0090 and offers seen into 1.0100. The seemingly soft ADP reading for August at 132,000 played into the early EUR/USD gains, but non-farm payrolls — forecast at 300,000 — will be key.

Waning angst about European natural gas supplies before winter also helped the euro’s macro outlook a bit, though the dollar’s policy underpinnings received support this week after Fed speakers said real rates need to go positive.

With the real fed funds rate at -6.0%, either inflation has to tumble or more rate hikes than those already priced in will be needed.

French ECB policymaker Francois Villeroy de Galhau said the ECB rate hike expected next week should be “orderly and predictable”, which sounded like a vote for a 50bp increase rather than the 75bp slightly favored by markets.

Sterling was down 0.32% after hitting a new 2022 low, with EUR/GBP’s 0.65% rise on newly aggressive ECB rate hike expectations overshadowing the BoE’s more staid rate hiking path amid an even more daunting UK inflation outlook.

USD/JPY was cloistered in a tight 138.28-88 range and near flat, just below July’s 24-year peak at 139.38 on EBS that could well be displaced if Friday’s payrolls reinforce the hawkish Fed scenario and negate weak ADP concerns. If so, the next major hurdles will be by 140.

The dollar was modestly firmer against the Australian and Canadian dollars as risk acceptance remained restrained and commodities struggled with the prospect of tightening central banks hurting demand.

Thursday features S&P Global’s August manufacturing PMIs, ISM and US jobless claims.

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