USD grind high extends in quiet trade, focus on CPI - Scotiabank

The creeping, low vol grind higher in the US Dollar (USD) is extending a little further ahead of this morning's key risk events--US CPI and the ECB policy decision. Dollar Index (DXY) gains are moderate but extending back to the body of the flat range centered around the 98 level that has largely prevailed since the July NFP shocker at the start of August, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

DXY gains are moderate

"Motivation for the dollar bid appears thin amid little fresh news or developments, although the JPY is underperforming amid renewed scrutiny of potential candidates to replace outgoing PM Ishiba. US yields are down fractionally on the session amid mixed global bonds generally. Stocks remain well supported. Lower than expected PPI data yesterday, led by a drop in services prices, drove US yields a little lower but movement was limited."

"Stocks firmed (the S&P 500 hit a new record) but then gave up most of those gains, perhaps reflecting the fact that the PPI data rather suggested that price increases are being absorbed by firms, rather than passed on to consumers, squeezing margins. This may weigh on corporate profitability moving forward. Markets continue to fully price in a 1/4 point cut from the Fed next week."

"Expectations of a potentially more significant easing move remain limited (around 10% risk of an additional 25bps cut reflected in swaps). President Trump urged the Fed to enact a "big" cut in the policy rate after yesterday's data and may chip in again on the policy outlook if CPI trends match PPI data."