FX Daily: Is the dollar rally getting tired?

USD: Price action suggests rally could be running out of steam
Dominating global FX and rate markets last week continued to be the Federal Reserve narrative of rates staying ‘higher for longer’. Some slightly higher-than-expected inflation prints and hawkish commentary – putting 50bp hikes back on the table – helped drive US yields and the dollar higher. Friday’s price action, however, suggested that February’s hawkish re-pricing of the Fed story might have come far enough for the time being. US yields reversed from highs seen in early Europe on Friday and DXY dropped quickly from a high of 104.60. On Friday, we had said that this DXY rally could extend to 105.00 or, with outside risk, to 106.50. Yet Friday’s price action suggests those levels could be out of reach.

Determining whether this month’s dollar bounce has any further to go will be two key inputs. The first is Wednesday’s release of the FOMC minutes of the February meeting where the Fed hiked 25bp. As ING’s US economist, James Knightley, discusses in the week ahead, the focus will be on how close the Fed was to hiking 50bp at that meeting. Watching Fed Chair Jerome Powell’s press conference at that meeting, he came across as pretty relaxed and announced that the disinflation process had started. However, the market could be sensitive to suggestions that a 50bp hike had been a close call. On the same subject, Friday’s release of the January core PCE deflator – expected at 0.4% month-on-month – will also shed light on the disinflation story.

Overall our base case is that February’s dollar rally is a correction – but this week will determine whether it runs out of steam or has a little further to go. In addition, this week will see much focus on the anniversary of Russia’s invasion of Ukraine and a potential speech from Russian President Putin. In addition, the dollar story could on Friday be driven by USD/JPY. Here, nomination hearings take place for new Bank of Japan Governor, Kazuo Ueda. He is seen as more of a pragmatic academic than the ultra-dove of his predecessor, Haruhiko Kuroda. Any hints of a change to the BoJ’s ultra-dovish monetary policy could see USD/JPY sell off again – dragging the broader dollar with it.

Expect narrow-range trading in DXY today.

Chris Turner

EUR: PMIs in focus this week
EUR/USD bounced off a low at 1.0613 on Friday – largely as US rates softened through the day. Interestingly, EUR/USD did not seem to take too much notice of comments by the European Central Bank’s Isabel Schnabel that the disinflation process had not even started in the euro area. Two-year EUR swap rates jumped 8bp on the remarks, but had completely reversed by the end of the day suggesting market participants feel the hawkish story might have come far enough for the time being.

This week, the eurozone focus will be on business confidence in the form of PMIs and the German Ifo. The PMI readings are seen hovering around the 50 area and the market may take more notice of the Chinese February PMI readings which come out later next week. As above, the dollar rally might have come far enough for the time being and EUR/USD found good demand ahead of 1.06. It will probably require quite a hawkish set of FOMC minutes on Wednesday for EUR/USD to break towards 1.05 – where we expect to see good demand ahead of a EUR/USD rally in the second quarter.

Elsewhere, the focus will be on Sweden today and the release of the minutes of the central bank’s February policy meeting. That meeting delivered a hawkish 50bp rate hike. Let’s see whether the minutes shed any further light on how concerned the Riksbank has been with recent weakness in the krona.

Chris Turner

GBP: Sunak struggles to make progress
Sterling enjoyed a modest recovery on Friday as the dollar softened through the day. We doubt sterling strength owes much to PM Rishi Sunak trying to make progress on revisions to the Northern Ireland protocol. Here, eurosceptics in the Conservative party, including former PM Boris Johnson, will try to thwart any progress. And Sunak will be reluctant to have to rely on opposition Labour votes to win progress in parliament.

Instead, it will probably continue to be monetary policy that drives FX trends. There is little UK data this week, but we will hear from a few more Bank of England speakers. We think BoE rates will peak at 4.25% in March – not that far from market pricing of a peak at 4.35%. Expect EUR/GBP to stay range-bound and GBP/USD to be bounced around by the dollar trend.

Chris Turner

CEE: Back to gains
As we head into the second half of the month, the calendar in the region is lighter this week, but even so, Poland remains in the spotlight. Last Friday, S&P kept its rating unchanged with a stable outlook. Today, we’ll see industrial and labour market data for January. We expect industrial production to increase by 4.4% year-on-year, slightly below market expectations. Also tomorrow, Poland will release retail sales for January. Here, we expect a slightly higher number compared to surveys. On Thursday, we continue with unemployment numbers in Poland before moving to the Czech Republic on Friday, where consumer confidence for February will be released.

In the FX market, we saw a wave of selling in the CEE region last week but also a boost in interest rate differentials limiting a more pronounced sell-off in our view. The global story should play out this week and with the US dollar running out of steam, the CEE region should return to gains. The main focus will be on the Hungarian forint and Polish zloty. We believe the forint should outperform and benefit from the massive rise in market rates last week. Moreover, the depreciation has eased the pair in a crowded long trade. Thus, we expect a return to 380 EUR/HUF. The zloty should still find its way out of last week’s European Court of Justice ruling. We expect stabilisation around the current 4.76 EUR/PLN. However, we are likely to see more headlines following the ECJ ruling which could point to a new direction.

Frantisek Taborsky
Source: ING