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Traders Thoughts - USD sellers all the rage into US CPI

Chris Weston
Head of Research
12 Jul 2023
We eye US CPI (22:30 AEST) in the session ahead, with the market looking for 0.3% MoM on both the headline and core CPI measure. It’s the month-over-month clip that is the more interesting period to consider given base effects will be so influential in driving down the year-over-year metric, where we recall the June 2022 US CPI print was so incredibly strong at 1.2% MoM.

The manner in which US equity has traded, with the US2000 rallying 1% in cash trade and the US30 pushing towards 12-month range highs, suggests the market is squaring up shorts and positioning for a 0.2% MoM CPI print. Granted, US banks are finding better buyers, with the XLF ETF breaking out, but that may be more related to position squaring ahead of Q2 earnings that roll in on Friday. However, the thesis that the market is positioned for a lower inflation print is also backed by flows in FX markets, with the USD index breaking below the 22 June lows.

Notably, we see EURUSD holding above 1.1000, while GBPUSD has been well traded on the break of 1.2900 and the strongest levels since April 2022. Another super strong UK wage print resulting in UK 10yr gilt (bonds) yields widening to a 68bp premium to US 10yr Treasuries.

Blue – UK-US 10YR bond spread

Orange – GBPUSD


It’s hard to chase GBPUSD higher from here, and when we consider positioning into our risk vs reward trade-off, many have focused on the extreme net long position - should we see a medium-term sentiment shift towards the USD, then positioning could become a significant headwind for GBPUSD.

USDJPY has also seen good activity, with JPY shorts covering and the short-term momentum putting a break of 140.00 as a clear risk – a closing break here and trend resistance at 139.30 comes into play. One for the scalpers.


Interestingly, we’re seeing USDJPY 1-month implied volatility rise to 11.42% - the highest level of expected volatility since mid-April. This is weighing on carry positioning, although for JPY-funded carry positioning to really fall apart, I suspect we need to see vols trade closer to 14%. Given how much capital has been parked into long carry strategies, higher implied vol is certainly a factor money funds will be watching closely.

The set-up in USDCHF also interests with price bear trending and pushing to the lowest levels since early 2021, with price also closing firmly below the lower Bollinger Band. One for the mean reversion traders to place on the radar.

Reverting to the skew of risk in the US CPI print, and it’s worth noting that while the market is positioned for a softer CPI print, the Cleveland Fed core CPI nowcast model sits at 0.43%. If that proves to be on the money, the outcome should see US Treasury yields rise, in turn, promoting USD shorts to cover.

It’s certainly hard to see a US core CPI print below 0.2%, and at the risk of being pedantic, we may be working to two decimal places, where a print of 0.26% may move the USD dial. Of course, we watch for trends in key metrics such as ‘core services ex-shelter’, while used car prices will likely be weak and play a key role in the outcome.

 The market runs short USD exposures into CPI, let's see if that proves to be the right position.

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