FX Daily: Dollar will experience correction
USD: Too strong compared to interest rates
Geopolitical news should remain at the center of attention today. The US has softened its stance on a deadline set Thursday for Ukraine to accept a peace deal with Russia, and a new 19-point agreement will be discussed in the coming days. German Chancellor Merz appeared to play down the chances of a breakthrough this week, while the Kremlin has been optimistic.
Currency market reaction to Ukraine’s peace prospects has been minor so far, with no break higher on high-beta European FX or serious pressure on the Swiss franc, the preferred safe haven for European risks.
The most prominent currency in the G10 is the yen, which continues to face a speculative test of the Japanese government’s tolerance. Reports that Trump-Xi talks included discussions regarding Taiwan yesterday also didn’t help the JPY. The diplomatic rift between Japan and China over Taiwan continues, and markets added some risk premium to the yen based on the potential economic impact of Beijing’s retaliatory actions. Thinner liquidity around Thanksgiving could provide good conditions for the BOJ to intervene on USD/JPY, ideally after a market-driven correction in the pair.
US data may have the potential to trigger such a correction, but not today in our view. Retail sales will be quite strong, and we expect consumer confidence to fall modestly to 93.5, near consensus. We also see September PPI in line with expectations at 0.3% MoM.
We do not expect any major implications for interest rate expectations, which are currently driven by several dovish Fed speakers. Along with Chris Waller, we heard Mary Daly support cuts in December. He’s not a voter this year, but his stance still represents dovish pressure on the FOMC in its imminent decision. Markets are again pricing in 19bp of easing for December, but the dollar remains resilient. Some rebalancing flows late in the year before Thanksgiving may be a drag, but unless markets have a hawkish rethink, the dollar looks too strong relative to short-term interest rate differentials at these levels, and we see some material downside risks.
Francesco Pesole
EUR: So far untouched by news regarding Ukraine
EUR has not seen any real benefits from the Ukraine peace talks, and is trading at an undervaluation of 2% vs. USD this morning, according to our model. This is not specific to the euro, as overvaluation of the dollar is similar, or even higher, across the G10.
On the data side, we saw yesterday’s German Ifo. The impact was not very positive, as German business sentiment worsened in November. Expectations weakened despite a slight improvement in current conditions, reflecting waning optimism following previous fiscal stimulus hopes. The lack of spending in the 2025 budget suggests that stimulus may not start until next year, giving hope for 2026.
EUR/CHF may prove to be the preferred way to play Ukraine’s peace hopes, but an undervaluation of EUR/USD cannot be ignored, and a return above 1,160 in the near term remains our bottom line.
Francesco Pesole
GBP: Nervousness increases ahead of Budget
EUR/GBP’s one-week implied volatility is trading 3 volumes above realized, which is the highest relative gap since Mini Budget 2022. This signals that despite the recovery in back-end sectors, currency markets remain concerned ahead of the UK Budget announcement tomorrow.
The pair may stay around 0.880 for today amid a wait-and-see approach. Unless some Budget anticipation appears in the media and moves the markets (a risk that cannot be ignored).
Here are our latest notes on the Budget – after the government’s income tax changes. We have previously published a scenario analysis for FX and rates.
Francesco Pesole
NZD: Final cut by RBNZ
As discussed in our RBNZ preview, we expect a 25bp rate cut tonight in New Zealand (announcement at 03:00 CET). This would bring the interest rate to 2.25%, which we believe is a terminal interest rate, as disinflation may prove slower than previously thought and growth more resilient.
The statement doesn’t completely rule out the possibility of further easing, but we think the new interest rate projections will signal no further cuts. The hawkish message was enough to trim some remaining expectations of further easing in 2026 (estimated at 42bp in May) and lift the NZD.
We remain bullish on NZD/USD and expect a return above 0.570 by year-end.
Francesco Pesole
Source: ING
