US recap: Quarter-end dollar pullback fizzles on inflation updates

Sept 29 – The dollar’s quarter-end pullback versus the euro, yen, and sterling fizzled on Friday at daily tenkan supports after inflation data from Japan, the eurozone and the US weighed more on short-term bund and gilts yields than Treasury yields and as US spending data remained solid versus German sales 1.2% dive.

Final Michigan consumer sentiment came in above forecast and final 1-year and 5-year inflation expectations were 0.1% higher than the preliminary, though still down from August.

New York Fed President John William reiterated officials’ data-dependent posture and high-for-longer rates guidance on Friday. The market isn’t pricing in further hikes, but neither is it for the ECB, with both seen likely to begin cutting rates by July.

The net result was that 2- and 10-year Treasury yields found support near 5% and 4.5%, bouncing slightly off the lows and helping the dollar recoup its earlier losses.

EUR/USD was flat, but was well off the 1.0617 high by the 10-day moving average and tenkan. Subsiding period-end squaring of September’s 4% slide, and what is set to be the eleventh consecutive week of losses, helped cap prices. But prices now need to break this week’s 1.0488 trend low by 2023’s 1.0482 trough on EBS to resume the downtrend.

With a US government shutdown seen quite possible on Sunday, markets and the Fed may be without key government economic data such as Friday’s employment report. That might leave the highly Treasury-yield sensitive USD/JPY uptrend to trade off of Monday and Wednesday’s US PMI reports, while dealing with the potential for MoF intervention to support the yen above 150 and toward 2022’s 32-year peak at 151.94.

USD/JPY’s early dip to tenkan and other support was scooped up by traders happy for any discounts while Fed-BoJ policy divergence remains immense.

Sterling fell slightly and was well off its 1.2271 Friday high by the daily tenkan and 10-DMA.

Aussie and USD/CNH were little changed, though seasonals might favor riskier assets and high-beta currencies in the fourth quarter.

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