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FOREX: USD Index Firmer, But Uncomfortably Close to Cycle Lows

FOREX
  • The greenback is firmer, but well off the session's best levels headed into the NY crossover. Market focus remains on the cycle lows in the USD Index posted yesterday at 100.514, with Fed pricing and the closing proximity to the September FOMC decision still largely responsible. OIS markets price ~33bps of easing at present, but it's year-end and early '25 rates pricing that's proving more influential, with markets now pricing 100bps of cuts across the full year and 175bps by the end of H1 next year - leading the greenback lower.
  • An early phase of crude oil weakness has worked against oil- and commodity-tied FX, forcing NOK underperformance against all others in G10 on an intraday basis. As a result, EUR/NOK has recovered off the 50-dma support of 11.6973 - a level that's been tested, and held, on several occasions across August. 
  • GBP/USD hit a new cycle high yesterday at 1.3266, and we flag the close co-movement of the pair and US equity markets, noting that despite the fade off mid-July highs in the GBP net position (still long ~30% of open interest), options markets remain cognizant of the upside risk - GBP/USD 3m risk reversals are further reversing the premium for put vol over calls, which has persisted since March 2020 and the onset of the COVID  pandemic in March 2020.
  • Datapoints are few and far between Wednesday, keeping focus on central bank comms, with BoE's Mann and Fed's Bostic both scheduled to speak. NVidia's after-market earnings should also draw focus given the stock's lead across US equity markets and the proximity to all-time highs in the e-mini S&P. 
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