FX Daily: Data holds the key to FOMC balance

Pressure on the dollar has persisted as the combined effect of abating geopolitical risk and a dovish tilt by some Fed members keeps favouring short positions. Fed Chair Powell concluded his two-day Congress testimony with a broad reiteration that he remains concerned about the tariff impact on inflation, and didn’t give much away aside from strict conditionality when it comes to easing plans.

Powell continues to attract the heat of the Trump administration, and now that two members (Waller and Bowman, both appointed by Trump) are openly disagreeing with the cautious/hawkish stance, markets may well be quick to respond with a dovish re-rating of expectations to soft US data. At the same time, media reports that Trump is considering an early appointment for the next Fed chairman are further bolstering dovish bets.

Today, aside from any further revision in the third release of first-quarter GDP data, focus will be on May’s durable goods orders as well as weekly initial jobless claims. News on the jobs market has significant impact potential now that inflation figures for May have failed to trigger a dovish response by Powell, even though the Fed-preferred PCE is only published tomorrow. The rationale could be that if something moves on the second part of the mandate (full employment), a few more FOMC members could join the dovish ranks despite inflation concerns. Markets are pricing in a one-in-four chance of a cut on 30 July, and 62bp of easing by year-end.

Fedspeak can also be quite impactful: today, we’ll hear from Goolsbee (voter, dove), Barkin and Daly (non-voters, hawkish-leaning), as well as Hammack (non-voter, hawk). Downside risks for the dollar persist, but another 1-2% plunge in DXY will look stretched without any dovish repricing in Fed expectations or tariff/deficit concerns resurfacing.

Francesco Pesole

EUR/USD finally broke above the 1.163 area, but faces equally harsh resistance around 1.170, a crowded strike level for long-euro options. The euro might have drawn marginal support from NATO agreeing on the 5% defence spending target and Trump sounding broadly conciliatory towards its allies (with the exception of Spain).

But in practice, EUR/USD remains almost entirely a USD story. The eurozone calendar is also quite light today, while Lagarde, Schnabel and Guindos are all scheduled to speak (they might not all touch upon monetary policy, though).

A clearing of the 1.170 level should set the sights on 1.20, although some further deterioration in US-specific factors may well be necessary to get there, as discussed above.

Francesco Pesole

The region continues to make gradual gains across the board, confirming our bullish bias here. Yesterday, we saw some rebound in CEE rates, correcting a bit of the previous rally following the announcement of the ceasefire between Israel and Iran. Overall, conditions for the region remain purely bullish. We see the interest rate differential wider in all countries, EUR/USD at its highs and central banks fairly hawkish. As we discussed here earlier this week, we saw the National Bank of Hungary on Tuesday and the Czech National Bank on Wednesday, both delivering a clear message that the bar for further rate cuts is very high. Next week, focus shifts to Poland, where we could also see a hawkish tone, unlocking some more potential for PLN.

Overall, we remain bullish on the CEE currencies. We believe EUR/HUF can test 400, supported by the hawkish NBH. In the Czech Republic, we see EUR/CZK at 24.700 with potential to go to 24.500 if our expectations of hot inflation numbers in June are met. In Poland, we lack a driving factor at the moment, but we will see the National Bank of Poland meeting next week which could add momentum to EUR/PLN lower.

Frantisek Taborsky

Yesterday's meeting of the Czech National Bank was as expected. Rates remained unchanged and the tone was hawkish. On a more detailed note, we also saw some upgrade in hawkishness during yesterday's press conference. The governor raised the inflation risk measure from “moderately inflationary” to “inflationary overall” and called it deliberate, given the accelerating momentum in core inflation. Given the hot inflation numbers in June and July, it is clear that the August meeting, when the central bank will have a new forecast, will not be live either, and the CNB wants to wait longer. For us, this essentially means the end of the cutting cycle, but we will have to wait longer before it becomes obvious to the CNB and the markets.

The market still anticipates one rate cut, but we believe this expectation will come under pressure with the next inflation reports. This should be the point where the market starts to consider whether the CNB's next move is a rate hike. We are not there yet, but we believe this may be the market's direction for the coming months. Therefore, we continue to like the CZK, which may offer better risk-reward than paying rates currently. In our view, EUR/CZK should slide further down, potentially to 24.500.

Frantisek Taborsky