[MARKET ANALYSIS] Contained trade across the FX space as traders eye US PPI and ECB

Snapshot: G10s are mixed against the flat USD. The Kiwi incrementally gains, whilst the JPY posts slight losses. Ultimately, price action has been sideways this morning, with focus on US PPI and the ECB later. DXY trades sideways and holds within a 98.70 to 98.82 range. There has been a lack of pertinent newsflow for the USD this morning, and it ultimately awaits US PPI this afternoon. There may be added focus on today’s report, with traders looking for any clues heading into the CPI report on Friday. Jobless Claims are also on the docket. Yields continue to trudge higher, as energy benchmarks remain above USD 100/bbl. However, as mentioned in yesterday's piece, the USD has largely ignored the higher yield environment. Much of this is likely due to the recent JPY strength, and also some fiscal-related fears creeping into markets. Moreover, markets will likely avoid making firm bets on the USD ahead of CPI (tomorrow) and the Fed next week. Interestingly, President Trump pledged a USD 5,000 'Trump dividend' to all adults in the US if Republicans win the Midterms. Given the ongoing woes surrounding fiscal credibility/sustainability, a policy like this would only exacerbate the move higher in yields, and likely spur downside in the USD. It seems like traders are viewing the pledge as nothing but a little bit of lip service, with the USD largely unreactive. EUR trades within a 1.1629 to 1.1641 range, and holds near its 200-DMA at 1.1633. EUR action will be dictated by the ECB this afternoon, where the Bank is set to deliver a 25bps hike. Aside from the decision, focus will be on the updated staff projections (inflation to be upwardly revised), and any guidance for action later in the year. ING opines that President Lagarde could use her presser to push back on some of the markets’ hawkish bets, which currently price in another hike this year. However, the likelihood is that the President will reiterate her data-dependent and non-committal approach. JPY has been in focus for the past couple of weeks, with USD/JPY falling c. 4.5% since the start of the month. The pair is a bit more contained this morning, despite hawkish commentary from BoJ’s Masu, who stated that he expects to continue raising rates given current accommodative conditions. USD/JPY currently holds at the mid-point of a 153.28 to 153.74 range.