FX Daily: A week of disinflation tests

The US dollar index has eased back modestly over the past week after trading at its 2024 highest. The repricing of rate expectations following the hot US payrolls figures has offered some continued support in the dips to the dollar: this week, the US CPI release (tomorrow) can be the new catalyst for larger positioning shifts in FX.

Our economics team’s estimates are aligned with consensus for a 0.3% month-on-month core print, but we think the risks are skewed more towards a 0.2% than a 0.4% print. Accordingly, there are some downside risks for dollar, even though our base case is for a consensus print to leave few marks on the FX market. Ultimately, investors may need to look elsewhere to fine tune rate Federal Reserve rate expectations, which currently see a first rate cut in June. A week retail sales print on Thursday may revamp expectations for a May rate cut, and take the dollar lower.

That said, evidence for the jobs market and the lack of faster disinflation should still be enough to discourage aggressive dollar selling. We remain comfortable with our call for some extra resilience in the dollar in the first quarter, before a clearer downtrend emerges from the second quarter.

Today, the US calendar is quiet data-wise. On the Fed front, there are speeches from Michelle Bowman, Thomas Barkin and Neel Kashkari.

Francesco Pesole

The number of comments by European Central Bank (ECB) officials has intensified in the past few days, and so has a divergence in views expressed by different members. Fabio Panetta, the most dovish voice in the Governing Council, endorsed rate cut expectations, saying that the time for monetary easing is “fast approaching”. That unsurprisingly differs from the latest remarks by Isabel Schnabel (a hawk), who warned against cutting too early, but also from more dovish members like Mario Centeno and Pablo Hernandez de Cos, who still seem to prefer caution over dovish guidance.

Despite some voiced unhappiness from doves like Panetta, consensus among policymakers appears to be favouring holding rates should at least until April’s European wage statistics. June looks increasingly likely as the starting date for monetary easing, and markets are also buying this view with increasing confidence. We agree with a June cut, but still think markets are overestimating the ECB’s easing cycle by around 40bp by December. Conversely, markets pricing for a 125bp of Fed cuts in 2024 seems too conservative (we expect 150bp). The convergence of US and EZ rates will – in our view – be the bigger driver of a EUR/USD rally by year-end.

In line with our dollar view, though, the holding pattern that EUR/USD has shown recently may well remain the norm in the coming weeks. US CPI will be the big highlight for the pair this week, while the eurozone calendar’s main release is tomorrow’s ZEW survey out of Germany. We see some modest downside risks for the dollar this week, and think EUR/USD can find some support back above 1.0800, although a return to the 1.093/1.0950 area looks premature. On the ECB side, keep an eye on Philip Lane’s speech today.

Francesco Pesole

The second-best performing currency after the USD of 2024, the pound, is about to face a couple of key data tests this week. Tomorrow, jobs data for January is released, and Wednesday sees the CPI report and Thursday GDP data.

Our economics team sees both wage growth and services inflation remaining sticky in the first quarter, meaning that the Bank of England will have no rush to turn to a more dovish communication in the near future. Markets are expecting the BoE to move with a delay (in August) compared to the ECB’s and Fed’s easing cycles. We agree, but also see 100bp (vs 80bp priced in) of cuts by year-end.

Some GBP weakness against the EUR down the road is therefore our base case, but the short-term outlook remains quite constructive for sterling.

Francesco Pesole

We have another busy week ahead of us in the CEE region. Today's calendar is basically empty but it will be more interesting in the coming days. Tomorrow we will see the decision of the National Bank of Romania where we expect rates to remain unchanged. Then the current account for December in Poland, the Czech Republic and Romania will be published. On Wednesday we will see fourth quarter GDP in Poland, Hungary and Romania and industrial production in Romania. On Thursday, January inflation will be published in Poland and the Czech Republic. In both cases, we expect a result below market expectations. And on Friday, the Czech National Bank will publish the minutes of its February meeting when it cut rates by 50bp to 6.25%. As always, you can find all the numbers in our latest week ahead article.

Our pick last week was a higher PLN/HUF, which touched 90.00 for the first time ever on Friday. Still, PLN remains our favorite in the region due to hawkish central bank support and payers in the rates market. On the other hand positioning is clearly an issue here slowing more gains. A slow grind to 4.30 EUR/PLN is thus our scenario for this week. EUR/HUF on the other hand is being pulled higher as the market puts the 100bp rate cut bets back on the table. Therefore, we see a fairly wide range for these days of 386-390. EUR/CZK has jumped to 25.20, the highest since early 2022, following the CNB's rates cut by 50bp. We expect some downward pressure on rates to persist in the market this week, especially due to the inflation print on Thursday. EUR/CZK could thus test 25.30. However, after that however, we think market pricing will hit a limit and it makes sense for us to think about fading this move in EUR/CZK.

Frantisek Taborsky