FX Daily: Navigating the Storm in Currency Markets
A turbulent week for FX markets
The FX landscape is experiencing a whirlwind of activity, with US tech stocks taking a hit and metals markets in flux. Despite this, interest rate volatility remains surprisingly calm, offering a degree of protection to those heavily invested in FX carry trades. Today's focus shifts to rate meetings in the eurozone, UK, and Czechia, along with some secondary US jobs data.
USD: Tech Stocks in the Spotlight
One of the most prominent trends in FX markets this year - the backing of procyclical G10 and emerging market currencies - is undergoing a correction. We've witnessed notable reversals in popular pairs like USD/ZAR and USD/MXN. This isn't due to interest rate markets, which are stable, but rather stretched positioning and a challenging US equity environment.
The attention this week is on US tech stocks, which have underperformed after Anthropic's AI tool challenged conventional software companies. While it's difficult to predict the longevity of this correction, a fully invested buy-side could be vulnerable to negative news.
But here's where it gets controversial...
Simultaneously, the metals market remains volatile. Large silver sell-offs are seen as mildly positive for the dollar, with a causal link seemingly forming between silver and FX. Our commodities team's analysis (https://think.ing.com/articles/a-gold-and-silver-reset-not-a-reversal/) suggests a reset rather than a reversal, backed by large flows into Silver ETFs on Monday.
So, what does this mean for the dollar? Typically, a difficult equity environment leads to a flight from risk and procyclical currencies, favoring the dollar. This is likely providing some support this week. However, dollar gains may be limited. A US-led equity correction could significantly impact US activity, prompting more aggressive Fed easing and ultimately weakening the dollar. Additionally, the US diversification theme is expected to linger over the dollar for most of the year.
For today, the macro focus shifts to secondary US jobs data. Weekly initial claims have been low, near 210k, but the December JOLTS job opening data released at 1600 CET may attract more interest. The focus will be on the layoffs figure to assess the health of the no-hire, no-fire economy. The Fed's Beige Book ahead of the January FOMC meeting showed no deterioration in the jobs market, suggesting a notable spike in layoffs is unlikely today.
DXY may remain gently bid, especially as USD/JPY explores the upside ahead of Sunday's election in Japan (https://think.ing.com/articles/japan-election-preview-what-a-big-ldp-win-could-mean-for-the-economy-bonds-and-the-yen/). DXY could edge up to the 98.00 area, but the case for significant gains is yet to be made.
Chris Turner
EUR: Lagarde Faces Questions on Euro Strength
The cross-currents mentioned above have weighed on EUR/USD this week. However, it has remained resilient, especially considering the recent spike in energy prices. Today's ECB press conference at 1445CET will be a challenge for EUR/USD. President Lagarde is likely to be questioned about the ECB's response to euro strength.
The ECB's nominal trade-weighted euro is at multi-decade highs and appreciating at a 7-8% YoY rate. My colleague, Carsten Brzeski, discusses the ECB's potential reaction to a strong euro here (https://think.ing.com/articles/ecb-preview-the-first-real-global-euro-moment-4/). Comments from Lagarde, such as 'monitoring exchange rates closely' or mentioning increased downside risks to inflation, could impact EUR/USD, but it's unlikely to bury it.
A move below 1.1770 today could open up the 1.1700/1720 area, but we doubt EUR/USD needs to go much lower in the near term.
Chris Turner
GBP: Leadership Challenge in Full Swing
We might be reading too much into sterling's price action, but it did seem to sell off yesterday after PM Keir Starmer faced a confrontation from his own Labour MPs. Some argue that Angela Rayner effectively launched her leadership bid by calling for greater scrutiny of the vetting process for Peter Mandelson's appointment as UK ambassador to the US.
The prospect of a change in leadership, both for the prime minister and chancellor, remains a key threat to sterling this year. A replacement of the PM by Rayner would signify a shift to the left and raise doubts about the UK's fiscal position. With a by-election later this month and local elections in May, UK politics is set to be noisy for the coming months.
This week's EUR/GBP dip could be the low point for this quarter. Today, keep an eye out for the Bank of England statement at 1300CET. While it's early for the BoE to turn dovish, lower inflation into April means we still expect two cuts in the first half and a weaker pound.
Chris Turner
CEE: Central Banks Edge Closer to Rate Cuts
Today is a busy day for the CEE region, with a focus on the Czech Republic and Poland. This morning, January inflation figures for the Czech Republic are expected to drop from 2.1% to 1.1% YoY, below market expectations. However, it's important to note that January inflation in the Czech Republic is highly volatile due to New Year repricing. Estimates range from 1.1-2.0%.
We believe inflation of 1.0-1.4% should be enough for the Czech National Bank to cut rates in March. If inflation surprises below 1.0%, a rate cut could be expected at today's meeting. On the other hand, if inflation is 1.5-1.7%, the CNB may wait until May for more data.
Later today, we'll see the CNB meeting, where rates are expected to remain unchanged at 3.50% for now. The main focus will be on the new forecast and the vote split. The inflation outlook should move lower, but the key question is how the CNB views 2027.
Yesterday, the National Bank of Poland kept rates unchanged at 4.00%, and today we'll see the governor's press conference. While yesterday's decision was seen as hawkish, we believe it indicates a dovish path. The central bank expects inflation to be close to target, but we see January inflation below 2%. Today's press conference should maintain a dovish tone, and further inflation data is expected to lead to rate cuts.
Overall, both the koruna and zloty are expected to face downward pressure. EUR/CZK has moved into our targeted range of 24.350-400, and a low inflation number could push it to 24.400-500. EUR/PLN remains stable, but a dovish press conference could see it move above the upper edge.
Frantisek Taborsky
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