FX Daily: One Test Down, Four To Go

Friday's weak payrolls report delivered the first dovish signal in our five-test countdown to the September FOMC. Wednesday’s CPI is the next test; we expect a 0.1% MoM headline print to help the dovish case a bit further, keeping USD downside risks dominant. Good news for the yen, which is struggling with post-intervention short rebuilding.

Wednesday's CPI release is set to provide the second of five tests to our call for no Federal Reserve rate hikes this year.

USD: Plenty of dovish repricing can still happen

At the start of August, our call for no Federal Reserve hikes this year was set to face five major tests before the 16 September FOMC: two jobs reports, two CPI reports and Jackson Hole. Our feeling was that if those events failed to trigger a dovish shift in market expectations, pricing a September hike above 50% could itself have materially increased the risk of a hike, if only to avoid another bond sell-off on meeting day.

The first test arrived on Friday and came through clearly dovish and dollar-negative. As James Knightley notes, the -20k payroll print was not the only concern. More than 100k of downward revisions leave average payroll growth at just 20k over the past three months, with health and social care still doing most of the heavy lifting. Meanwhile, the fall in the unemployment rate was largely driven by people leaving the labour force rather than finding work.

We expect the second test, Wednesday's July CPI release, to send a similar, albeit less dramatic, message. Our forecast is for headline CPI at 0.1% month-on-month versus 0.2% consensus, and core CPI at 0.2%, in line with consensus.

Our dovish Fed call is strengthening, and so is our bearish bias on the dollar. Despite Friday’s repricing, 11bp are still priced in for September, 28bp for December and 40bp for April. There remains ample room for dovish repricing to harm the dollar if we are right about the Fed. Today, the US calendar is empty, but we’ll hear from Fed arch-hawk Beth Hammack.

The yen should, in theory, remain one of the main beneficiaries of dovish US surprises given its high sensitivity to rates. The problem is the seemingly inevitable bias to rebuild JPY shorts after an intervention episode. Neither intervention risk nor growing confidence in a September Bank of Japan hike – with this morning's minutes modestly more hawkish – appears sufficient to counter that trend. USD/JPY has already returned to the pre-payroll 158.30-158.50 area. The path ahead may remain choppy. A move back to 160.0 at some point this month remains a tangible risk, even if September ends up delivering both a BoJ hike and a Fed hold.

EUR: Potential break above 1.160 this week

The euro is entering a particularly quiet stretch for domestic drivers. The key July data releases are behind us, while August is typically a quiet month for European Central Bank communication. In any case, the ECB has already given markets a quasi-commitment to a September hike.

That leaves EUR/USD firmly dominated by the USD side of the equation. A softer US CPI print would increase the chances of a break above 1.160 already this week. The next important resistance beyond that is the 200-day moving average at 1.1630.

Our short-term fair value models are offering little direction at present, with EUR/USD broadly tracking moves in rates, equities and commodities. Short-term rate differentials have continued to grow as the main driver for EUR/USD (we discussed this in our latest live webinar last week), meaning sensitivity to the Fed story should remain very elevated.

RON: Rating relief but inflation keeps NBR cautious

Moody’s kept Romania’s rating at Baa3 with a negative outlook, following Fitch’s unchanged decision a week earlier. This should offer some relief after ROMGBs sold off by around 15bp at the long end last week, even as the rest of the region rallied. Today, the National Bank of Romania is expected to keep rates unchanged at 6.50%, and we see little reason for a shift in tone versus previous meetings, with our forecast still pointing to the first rate cut only in January 2027.

The more important release will be Wednesday’s Romanian headline inflation, where we expect the first visible easing, with inflation falling from 10.4% to 7.6% year-on-year. Still, the decline is largely base-effect driven, while month-on-month dynamics accelerated from June. Friday’s 2Q GDP data should point to only marginal growth of 0.1% quarter-on-quarter after stagnation in 1Q, alongside a year-on-year contraction across the first half of the year. EUR/RON remains anchored just below 5.25, and we expect limited movement given the NBR’s lack of room to tolerate additional inflation pressure. However, relief over the unchanged rating could support a RON rally today as buyers and carry trades return to the market.

CEE: Busy data week meets global market pressure

Outside Romania’s busy calendar, the rest of the CEE week brings final Czech inflation on Tuesday, with headline CPI expected to be confirmed at 1.7% and the focus on core inflation, which we see unchanged around 2.8-2.9%.

On Thursday, Turkey’s central bank will publish its inflation report, while Poland will release final CPI, likely confirming 3.0%, alongside 2Q GDP. We estimate Polish GDP growth accelerated to 3.8% YoY from 3.5% YoY in 1Q26, despite a further slowdown in private consumption, as investment growth gained momentum. Friday’s Polish core inflation should edge up from 3.0% to 3.1% YoY.

CEE markets remain mainly driven by global headlines. With no progress in US-Iran talks over the weekend, we expect a mixed open, especially after Friday’s regional rates rally following US jobs data. Higher oil prices could trigger some correction, while last week’s narrowing in rate differentials may put pressure on CEE currencies this morning. EUR/CZK remains in focus after closing above 24.250 on Friday, in line with our post-Czech National Bank meeting call, though we still see upside risk closer to 24.300.