FX Daily: Dollar rally looks tired
USD: More risk of correction
ADP payrolls numbers were good enough (42K vs 30K consensus) to keep markets in guessing mode regarding the Fed rate cut in December. ISM service was also stronger than expected. Interestingly, the dollar’s reaction was muted and was followed by an overnight correction. We read this as a signal that the market has priced in a lot of positives in the USD, and part of the dollar’s strength over the past few days is due to safe haven flows amid equity volatility.
The dollar has clearly regained its safe-haven appeal, meaning more equity corrections could still benefit the USD against currency activity. However the yen remains the preferred defensive tool in FX today. Japanese officials continue to experiment with verbal interventions, but without follow-up, the efforts tend to lose impact over time. If some risk-off fails to save the yen, expect more USD/JPY upside speculation to test the Bank of Japan’s tolerance limits (with 155.0 as an obvious target).
While we are seeing signs that the dollar rally is starting to weaken, it is also true that the market lacks a compelling story to rebuild the dollar shortfall. The lack of data and cautious Fed communication means there isn’t much to show for it. We expect trading to be rangebound today, with the risk of a dollar correction remaining due to near-term overvaluation. We also have Challenger layoffs data today, which may provide a downside surprise to the dollar and add fuel to the correction.
Most recently, the Supreme Court’s review of the Trump administration’s tariffs attracted significant attention. We discussed this here, and our basis is that the tariffs will remain in place, whatever decision is made.
Francesco Pesole
EUR: Still cheap
EUR/USD is trading well in undervaluation territory, as the dollar’s rally has gone beyond what can be justified by short-term drivers such as interest rate and equity differentials. At current spot (1.151), we expect an undervaluation of 1.3%. This means the next drop would either imply a significant increase in the premium on the euro (which generally drives a quicker reversal) or require a price adjustment by a hawkish Fed. We see no catalyst for the second level, and we expect a stabilization of the pair in the coming days with the risk of a rise to 1,160.
Elsewhere in Europe, Norway’s central bank announced its policy today. It is unlikely that we will see another decline, as the latest policy projections suggest a pause until mid-2026 and macro inputs have not changed significantly. The underlying CPI decreased slightly to 3.0% but the headline figure increased to 3.6% in September. Meanwhile, US interest rate expectations have been revised higher and the NOK has been under pressure of late, both of which are hawkish signals. We do not expect any change in communication and a neutral impact on NOK, which will recover if equity markets stabilize.
In neighboring Sweden, CPIF inflation for October was slightly higher than forecast at 3.1%, with core inflation also slightly above consensus at 2.8%. This broadly supports the Riksbank’s unchanged message yesterday: the bar for the next rate cut remains high. EUR/SEK’s reaction was small as markets expect little to no chance of another rate cut in the future. However, the data slightly strengthens our bearish view on EUR/SEK. We now target a return to 10.90 in the near term.
Francesco Pesole
GBP: Bank of England to persist, cuts in December
Markets are pricing in a 25% chance of a Bank of England cut today. As we discussed in our preview, our call is to hold interest rates, as one positive inflation number alone will not be enough to get the MPC majority to support a rate cut.
But the vote split could be 6-3 or perhaps a more dovish 5-4, indicating that there is no high bar for a cut in December.
We think there is some upside risk for GBP today as the market may not receive a clear signal heading into December’s move (16bp forecast), and also considering EUR/GBP is still trading around 1% above its short-term fair value. Due to the good back-end bank performance, we read that risk premium as anticipated speculation via FX regarding a worse economic outlook for the UK (rather than a worse fiscal position), which would still be reflected in short-term interest rates.
However, GBP upside remains limited in the coming weeks as the prospect of tax hikes and eventual CPI data may consolidate dovish speculation. Our year-end target remains 0.880 for EUR/GBP. Here is our UK Budget market preview.
Francesco Pesole
CEE: Dovish news coming to the region
In the Czech Republic, inflation last October provided a slight surprise with an increase from 2.3% to 2.5% YoY. However, the whispered figure appears to be below the 2.3% consensus and we see hawkish pricing, also supported by higher core interest rates. The main driver is again food prices. Although the market has moved to the hawkish side, we are turning to the dovish side instead. In recent days, we have seen several announcements of energy price cuts for households from providers, as well as new government proposals to subsidize regulated components and EU plans to delay the introduction of ETS2 to 2027.
Overall, the general inflation profile for the next two years has turned much lower, this will not be captured in the Czech National Bank’s new forecasts presented today. The decision on interest rates is not an important one, but future guidance will be important. We believe that the CNB has every reason to be neutral or slightly dovish given the latest news, and the market will challenge that hawkish assessment. While we do not expect this to lead to a rate cut, the market will turn dovish and also drive FX weakness. Therefore, EUR/CZK could move lower after yesterday’s CZK rate hike before the CNB meeting closer to 24.30, but tomorrow’s press conference and meeting with analysts should be somewhat dovish and return the pair to test 24.40 as we saw on Tuesday.
Elsewhere, the National Bank of Poland again cut interest rates by 25bp to 4.25% on Wednesday, in line with expectations, and presented a fresh summary of forecasts. Although the statement did not provide much guidance, the MPC still called the rate cut an “adjustment” and did not call it a cyclical cut despite a 150bp rate cut already this year. Our economists expect the central bank to take its usual pause in December and also skip its January and February meetings due to delays in publishing inflation, so we won’t see another rate cut until March.
However, attention will be on Governor Adam Glapinski’s press conference later today, which may reveal more. Given yesterday’s almost fully expected rate cut, the market didn’t have much reason to move in the interest rate space. The same thing is reflected in EUR/PLN, which still doesn’t have a big story. The key question is whether the governor will repeat today’s 4% interest rate as the first rate to stop the “adjustment” or allow further cuts along with market rates. This creates more risk on the hawkish side and some support for PLN. However, we expect EUR/PLN to remain in the 4,230-270 range.
Chris Turner
Source: ING
