Yen Continues to Dominate Amid Short-Squeeze, EUR/USD Rises 0.3% on Hot Eurozone Inflation Figures

Key Points

• The yen continued to outperform amid more downside in US yields, with some suggesting a short squeeze is at play.
• The DXY dropped to new three-week lows under 106.00 despite data showing hotter than expected wage and consumer price pressures.
• The euro got a small boost after data showed Eurozone CPI hitting a fresh record high in July.

Yen Rally Continues, DXY Drops

The Japanese yen continued to outperform on Friday and the US dollar fell to fresh more than three-week lows, with the yen benefitting from continued downside in US nominal and real yields. Some analysts said that yen strength may also reflect a short-squeeze, given that the yen had been one of the most heavily shorted currencies over the last few quarters as markets priced in aggressive rate hikes in the US versus no tightening in Japan.

USD/JPY dropped another 0.8% on Friday, breaking convincingly below its 50-Day Moving Average around 134.20 for the first time since Q1 and at one point even dropping as low as 132.50. The pair was last changing hands around 133.20. A deluge of US data on Friday that showed US wage pressures running hotter than expected in Q2 and consumer price pressures running hotter than expected in June failed to shift the narrative for the pair, which remained focused on Fed Chair Jerome Powell’s dovish tone at Wednesday policy announcement and on Thursday’s weak US GDP numbers.

The DXY fell to its lowest since July 5 in the 105.00s and was last changing hands around 105.80. A rally in US stocks in the last few weeks has dented the appeal of the safe-haven currency. The S&P 500 closed July 11% higher versus its mid-month lows, while the DXY has pulled back over 3.0% from the multi-decade highs it hit earlier this month.

Spicy Eurozone Inflation Lifts Euro (Slightly)

The unloved euro got a minor boost on Friday after data out of the Eurozone showed consumer price pressures hit a new record high in July, while Q2 GDP figures showed a more robust than expected pace of growth last quarter. Eurozone CPI came in at 8.9%, above expectations for it to remain unchanged versus June at 8.6%. Meanwhile, the Eurozone economy grew at a QoQ pace of 0.7% in Q2, though recent data suggests that the economic activity has been stagnating at the start of Q3.

EUR/USD pushed back above 1.0200, but remains below recent highs in the upper 1.0200s amid ongoing concerns about the impact of the energy crisis on the Eurozone economy as Russia reduces gas exports to the bloc. Elsewhere, GBP/USD was choppy, swinging nearly 200 pips within a 1.2060 to 1.2240ish intra-day range as focus turns to next week’s BoE meeting. USD/CAD, meanwhile, edged below 1.2800 for the first time since early June on stronger than expected Q2 GDP growth figures and a modest rise in oil prices. The Aussie and kiwi didn’t see much action.