FX Daily: Dollar steady as markets digest Fed signals

USD: Dollar steady after Fed meeting
Following the Fed meeting on Wednesday, the US dollar continued its decline yesterday, with the DXY closing near 98.00, close to our expectations. In our view, the bearish winds come not only from interest rates but also from seasonality at the end of the year. The dollar exchange rate showed another calibration towards lower Fed expectations, with the 2yr falling to 3.50% and markets pricing in 3.05% as the Fed’s final interest rate at the end of next year, keeping pressure on the US dollar.

Today’s US calendar does not have much to offer, and markets will stabilize after the risk events. On the other hand, some risk-off sentiment emanating from equities should provide a floor for the dollar. Overall, DXY around 98.350 with a slight dip to 98.200 seems reasonable for now, in our view.

Frantisek Taborsky

EUR: Attention turns to eurozone central bankers
German inflation figures for November are forecast at 2.6% year-on-year, the highest level in nine months, as part of the puzzle of rising euro interest rates and a shift in market assessments to the hawkish side. After the Fed meeting this week, market attention will turn to the ECB meeting next Thursday. President Christine Lagarde will present new forecasts, which will be the first test of the current outlook in the absence of further rate cuts, in line with our view.

The front of the EUR curve showed a significant upward movement this week, of 10bp in the 2 year term, which directly countered the USD exchange rate movement, supporting further spread tightening in favor of the EUR. After EUR/USD touched the 1,175 level yesterday, stabilization of the US dollar will bring a slight correction in EUR/USD towards the middle of the 1,170-175 range.

Elsewhere, UK GDP figures for October were marginally lower, with the economy unexpectedly contracting by 0.1% MoM, dragged down by the manufacturing sector, favoring the Bank of England to roll out cuts next week at its current forecast of 22bp. The pound was little changed this morning, but its open showed pressure to weaken closer to 0.878 EUR/GBP.

Frantisek Taborsky

CEE: Quiet end of week before central bankers meeting
The region is expected to experience a quiet Friday today before a busy week ahead. Inflation in Romania this morning showed no change at 9.8% YoY, slightly above market expectations but still confirming a peak in inflation and a possible decline in inflation in the middle of next year as the next step. However, the central bank is likely to keep interest rates on hold for a longer period, and the first rate cut is not expected until August next year. In Turkey this morning, inflation expectations showed a decline from 23.5% to 23.4% in one year’s time, as expected after November’s fall in inflation, but the slow rate of decline suggests persistence.

Next week, the CEE region will be busy again with attention to the final meeting of the year by the Hungarian National Bank and the Czech National Bank. Both central banks are expected to keep interest rates unchanged, but the NBH will publish new forecasts, likely with a lower inflation profile and the CNB is expected to reflect weaker November inflation and a lower inflation outlook due to lower household energy prices.

The Koruna is starting to recover after a small sell-off at the start of the week, triggered by a strong move in interest rate differentials. EUR/CZK fell to 24,200 yesterday, but the exchange rate suggests it is likely to be in the 24,250-300 range despite the weakening of the US dollar after the Fed meeting.

Frantisek Taborsky

TRY: Central bank cuts interest rates by 150bp amid weakening inflation
At its final rate-setting meeting of the year, the Turkish Central Bank cut rates by a larger 150bp compared to a more cautious 100bp cut at the MPC in October. This follows a better-than-expected headline inflation reading for November. The consensus was balanced between 100bp and 150bp ahead of the meeting. The move pushed the policy rate down to 38% from 39.5% while the interest rate corridor remained unchanged at 450bp.

Although the central bank emphasized that future interest rate decisions will remain data-driven and assessed on a meeting-by-meeting basis, it provided little clarity on near-term interest rate action. In this context, in our view, inflation expectations, the outcome of the 2026 minimum wage negotiations, and the anticipated automatic tax rate adjustment – ​​promised by Finance Minister Mehmet Simsek – will be important factors in this outlook, in addition to considerations regarding dollarization and the level of foreign exchange reserves.

Frantisek Taborsky
Source: ING