FX Daily: Dollar struggling to catch the tailwind

There is good and bad news for the dollar after yesterday’s payrolls. The good one is intuitive: job numbers were good. Unemployment declined to 4.3%, payrolls doubled the consensus at 130k, and wage growth was stronger than expected. That appears more than enough to offset the 862k payrolls revisions for 2025, especially considering the consensus was 825k.

The bad news for the dollar is that it should have rebounded more on the jobs data. Half of the initial USD rally reverted quickly, and that was not due to second thoughts on jobs figures: short-term dollar rates rose and stayed up. We instead read that as a sign markets remain minded to sell USD rallies on the back of longer-term considerations. This means the bar for a USD recovery is higher: more good data is needed, for a start.

Lower jobless claims today shouldn’t be enough, and some upward CPI surprises tomorrow are probably necessary to bring the dollar sustainable support. For today, we expect some stabilisation in DXY around 97.0.

Francesco Pesole

The support for EUR/USD continues to come almost entirely from strategic USD selling, with little to no contribution from the euro side. The eurozone calendar is empty today, and we don’t expect to hear anything market-moving from ECB speakers.

Yesterday, Ukrainian President Zelenskiy said next week’s discussions with the US will focus on a territorial deal. Ceasefire negotiations have moved too slowly to drive major FX implications, but next week might lead to some interesting developments. We’ll be monitoring European gas prices for any signs of ceasefire optimism: they have been under pressure since the start of February, but primarily due to expectations for milder weather.

EUR/USD may hover around 1.1850-1.1900 for today. We retain a slight preference for the downside, but a flat profile for the near term appears the most likely scenario.

Elsewhere, we have published our SEK outlook for 2026. We see short-term correction risks for the krona on the back of stretched valuation, but remain bearish on both EUR/SEK and USD/SEK into year-end.

Francesco Pesole

The UK economy ended 2025 on a lacklustre note. Though not a huge surprise, the weakness in construction and business investment is particularly eye-catching – even if the latter is partly linked to a cyberattack at a major UK car producer at the end of the third quarter.

Given we already had data for October and November, there's not a huge amount of new information here for the Bank of England. It had already concluded that the economy ended 2025 on a weaker footing. For the Bank, next week's jobs and inflation data will be much more instructive. So long as the recent weakness in hiring, coupled with the sharp slowdown in wage growth, continues, we expect a March cut from the BoE, followed by another move in June.

Our view remains broadly bullish on EUR/GBP on the back of this and of our call for two BoE cuts by June: 0.88 remains a very realistic short-term target.

Francesco Pesole

January inflation figures confirmed this morning the expected sharp drop from 3.3% to 2.1% YoY, below market (2.4%) and central bank expectations (2.2%). The January figure is key for the National Bank of Hungary and its February meeting. We saw attention focused on this figure already at the January meeting, after December inflation surprised slightly upwards. Another mention could be seen in yesterday's NBH minutes.

The breakdown shows a decline in year-on-year inflation across the board. Core inflation dropped from 3.8% to 2.7%, and more importantly for the NBH, service inflation slowed from 6.8% to 5.0% YoY. Today's figure should therefore be sufficient to restart the NBH cutting cycle from September 2024. We expect a 25bp cut in February and March and a total of 75bp this year, with 5.75% at the end of the year, but the key will be the general election in April and the market reaction.

Before the inflation figure was released, the market priced in a roughly 65% chance of a rate cut in February. Today's figure is likely to support further dovish bets, and we will soon see a fully priced-in rate cut. At the same time, the priced terminal rate is currently at 5.50%, well above our forecast of 4.50%, and we see the greatest potential for repricing here. This should put some pressure on the forint, which has seen a decent rally in recent days. Therefore, we can expect pressure to push EUR/HUF back above 380, probably into the range of 381-383.

Frantisek Taborsky