Asia wrap: US rates market faces pressure from multiple fronts

Rates are still under pressure, with today’s U.S. CPI report expected to give the Fed the green light for a rate cut next week. Adding fuel to the fire is Kamala Harris’s post-debate glow. Fresh from her widely perceived victory in last night’s presidential debate, Harris’s policies are viewed as inflation-lite, making rate cuts look even more palatable. And while the race remains wide open, Harris has undeniably gained some traction.

What’s also driving the rate slide? Oil prices are in free fall, pulling inflation expectations down with them. The Harris vs. Trump showdown dominated the airwaves, with most commentators handing Harris the win. Betting markets have followed suit, giving her a slight edge. And let’s not overlook the pop culture moment—a Taylor Swift Instagram endorsement post-debate. Swifties may not move markets, but they undoubtedly move the needle.

With the Fed laser-focused on the worsening labor market, today's CPI release is unlikely to shake up the rates market—unless there's a significant surprise. The real question isn't if the Fed will cut next week but by how much. A 25bp cut feels almost baked in at this point, but the possibility of a 50bp cut is still very much on the table, depending on how the Fed reads the tea leaves. One thing’s sure: the labour market will have a heavier hand in steering the Fed's decision than inflation data alone.

I want to emphasize that it will take at least 48 hours for the scientific polling to roll in, and already, there are murmurs from Trump-leaning independents about unequal treatment during the debate. Many are frustrated that VP Harris seemed to skate by without fact-checks, while every Trump answer came with its fact-check trailer. Frankly, I thought the debate was a mess. Both candidates were far from impressive. I'd be stunned if U.S. political risk doesn’t start rising after this.

So far, the dollar is weaker across the board, with AsiaFX outperforming and U.S. equity futures showing signs of softness. This aligns with the opinion polls suggesting that Harris edged Trump in the first presidential debate.

Lower yields make the JPY the currency of choice against a backdrop of shaky U.S. growth and risk sentiment.

As for the Euro, traders are still hesitant to dive in more profoundly ahead of the ECB tomorrow. The market seems cautious, waiting for clearer signals before making bold moves.

Still, as more scientific polling, particularly in swing states, rolls out over the next 48 hours, we should gain more precise insight into the FX market's reaction to the debate. With U.S. political risk potentially increasing, it wouldn’t be surprising to see EUR/USD testing 1.1100 before the week’s end. As uncertainty around the election builds, pressure on the dollar could continue, offering further support for the Euro.