FX Daily: Japan starts its US investment programme

The dollar has been edging a little higher this week and, in effect, reconnecting with the more upbeat US activity data. That trend is expected to continue today on the back of some constructive durable goods orders and industrial production data. After the European close, we will also see the release of the minutes of the January FOMC meeting, where a firm consensus around a pause should be evident. That could rein in current expectations of around 59bp of Federal Reserve easing this year, with ING's house call at -50bp. The uncertainty here stems from the likely arrival of Kevin Warsh as Fed Chair in May and how he will steer the central bank. Here, the market is on the lookout for any dates of confirmation hearings, which will be seen as a dollar negative event risk.

Away from the US, two events overnight can be seen as mildly dollar positive. The first is the more dovish than expected Reserve Bank of New Zealand meeting, where the new governor, Anna Breman, has sounded in no rush to hike rates later in the year. The market had been erring towards a Reserve Bank of Australia-like hawkish turn. The drop in NZD/USD has dented the view that optimism on the global economy could prompt a hawkish re-pricing across the board for the procyclical currency segment. Markets will now increasingly follow the New Zealand housing market and consumer sector – seen as the weak links in the recovery story.

The other hot story is the US and Japan announcing the first details of Japan's $550bn commitment to invest in the US. The first of these is a $33bn investment in a natural gas production facility in Ohio to be managed by a subsidiary of Softbank. Direct Japanese investment into the US will be a key watch factor this year, and one which adds to the very mixed picture on USD/JPY. Japanese Ministry of Finance data shows that new Japanese direct investment overseas last year rose back to the pre-pandemic peak of around JPY20tr annually. The question for FX markets this year is whether this investment proves a supportive dollar flow or something like Japan's FX reserves are used to guarantee new USD loans and avoid pressure on the yen. The latter seems to be the preferred outcome for Tokyo.

We do not see anything too negative out there at the moment for the dollar, and ahead of what should be a strong 4Q25 US GDP release this Friday, we think DXY can stay supported in a 97.50-98.00 range.

Chris Turner

Early Europe has seen the Financial Times report that Christine Lagarde could exit her position as President of the European Central Bank ahead of its natural expiry in October 2027. The reasons cited point to a preference for the next ECB president to be confirmed before the French presidential elections next April, so that Emmanuel Macron can still have a say. Expect focus to shift to two of the leading candidates to replace Lagarde: Spain's Pablo Hernandez de Cos and Germany's Joachim Nagel, who has even recently welcomed additional common borrowing in the EU. It looks too early for this story to impact the euro yet.

With Asia on holiday for the rest of the week and the data calendar relatively light today, expect EUR/USD to trace out a modest 1.1800-1.1850 range. We will also be interested to hear which foreign central banks are signing up to the ECB's expanded EUREP facility – something which, in theory, should be happening over the next three to four months.

Chris Turner

After being hit with soft labour market data yesterday, today's UK January CPI data has given sterling something of a reprieve. Here's what ING's UK economist, James Smith, has to say about today's data:

'It's a bit of a mixed bag on UK inflation this morning. Food inflation is down sharply (albeit more or less in line with Bank of England forecasts). That should be good news for the hawks, who worried that elevated food inflation would spark a more persistent, wider bout of inflation. But services inflation is stickier – and importantly, the BoE's core services metric (which we calculate) is up slightly. Not a game-changer here for the near-term BoE outlook, but at the margin moves the dial slightly closer to the hawks. The real action will come in April, though; if headline/services inflation comes down as far as expected, then that should go some way to making the Bank more comfortable with the inflation outlook.'

EUR/GBP is off modestly on the news, but should find support in the 0.8710/20 area. Later this week, we could get some flash eurozone February PMIs, which will be supportive for the euro. And next week's by-election in the UK could throw more political pressure on Prime Minister Keir Starmer's leadership team. Our EUR/GBP bias is towards 0.88 by the end of March.

Chris Turner

Yesterday's National Bank of Romania meeting, as expected, saw rates unchanged at 6.50%. Today we'll see the governor's press conference. The new forecast of the central bank shows a significant decrease in inflation in the third quarter, in line with our expectations. We will watch for signs of how much the NBR wants to wait for the widely expected decrease in inflation, or whether the weak economy will prevail, and we see a rate cut before the inflation decline in July and August. We still expect the first rate cut in May and 100bp overall this year.

In Hungary, despite the strong move in rates and FX on Monday, we did not see many signs of correction yesterday, and the market appears to have stabilised. This confirms our view that the market is not going to reverse much here, and the positive mood before the elections should continue to dominate sentiment. At this point, it is not very clear whether we can see more action in the HUF market before Tuesday's meeting of the central bank, when a restart of rate cuts is widely expected. However, we expect the market to remain in bullish mode for the next few weeks.

Frantisek Taborsky