FX Daily: Powell’s last act might carry a hawkish tint

The dollar has recovered some ground over the past 24 hours. While growing nervousness about the lack of progress on a US-Iran deal clearly played a role, it looks to us that it was mostly some jitters in US equities due to AI concerns that allowed the USD to rebound. As discussed yesterday, in many USD pairs, global equities are currently having the highest beta in our short-term models.

Ultimately, that USD recovery proved rather short-lived, and we suspect month-end flows played a role. Today, we’ll be waiting for any follow-up from Tehran after President Trump claimed that Iran is in a “state of collapse” and wants to reopen the Strait of Hormuz as soon as possible. At the same time, the Wall Street Journal reported that Trump has instructed officials to prepare for an extended blockade of the Strait. Another big event yesterday was the announcement that the UAE is leaving OPEC and OPEC+. Here is our commodities team's comment on this topic.

Domestically, the big event is the Federal Reserve’s rate announcement at 19 BST/20 CET. Here is our preview. Higher fuel and airline prices are pushing CPI back toward 4%, but the Fed has so far indicated it views this as a transitory supply shock rather than a demand-driven inflation spiral. Unlike the pandemic, supply disruptions are narrower and household real incomes are already under pressure, reducing the second-round effect risk.

There is a good chance the Fed will signal it’s still too early to conclude the inflation-growth trade-off and related monetary policy implications. However, the latest signs from the Middle East are not encouraging. While Powell’s signals may be taken with some caution, given that this should be his last press conference, the risks are that he errs on the hawkish side.

The positive dollar reaction in a hawkish surprise could be exacerbated by a hit to US equities, which will incidentally face a key test today with earnings releases from Alphabet, Microsoft, Amazon and Meta.

Francesco Pesole

Markets remain inclined to buy the dips in EUR/USD below 1.170, which has emerged as the key benchmark level for sentiment on the Gulf among FX investors. Today, if we see a combination of a hawkish Fed, poor risk sentiment and lack of progress towards the reopening of Hormuz, a decisive break lower should be on the cards.

Tomorrow’s ECB meeting should, in our view, largely meet market expectations (see our cheat sheet here) and the euro should default to being driven by risk sentiment and oil quite quickly.

On the data side, some flash CPI prints are due today. Spain is expected to see another tick higher to 3.5% in headline inflation but core unchanged at 2.9%. Germany’s headline rate should top 2.9%. Given pricing is already hawkish, the bar is rather high for these figures to trigger further underperformance in the front-end EUR curve.

Francesco Pesole

The Australian dollar is underperforming this morning after March inflation came in slightly below consensus. Headline CPI jumped to 4.6% vs the expected 4.8% in March, but resulted in a consensus 1.4% QoQ print for 1Q. The trimmed mean was 0.8% QoQ, a touch below the consensus 0.9%.

In our view, the pullback in AUD looks mostly a function of stretched positioning rather than a real rethink of RBA expectations. Markets are pricing in 18bp for next week’s RBA meeting, and we think this latest inflation jump will be enough to trigger a rate hike.

Risk sentiment remains a key driver of AUD, and today carries some risks with big tech earnings in the US and the FOMC. But we suspect externally-driven corrections in AUD/USD may encourage buying-the-dips close to 0.700 ahead of next week’s RBA meeting.

Francesco Pesole

Yesterday's meeting of the National Bank of Hungary brought no surprises as rates remained unchanged at 6.25%. From the market perspective, the meeting brought everything the market wanted to hear, in our view. The focus on FX stability remains and the central bank will not rush into any quick steps. At the same time, we did not see any signs of conflict with the incoming government. We also heard some talk about euro adoption, and although it is not exactly on the table, it remains an important catalyst for the market after the elections. In addition, the central bank's governor mentioned the prospect of a lower risk premium, in other words, possible rate cuts in future.

On the other hand, the market headlines probably indicate a more dovish tone from the NBH than the governor intended, and we do not want to overthink the governor's words here. Our baseline remains no rate change this year and the first rate cut next year. However, we see the risk of earlier cuts, especially if energy prices normalise in the near future.

The market reaction to the NBH press conference was a bit hazy, with global headlines dominating at the same time. This gave the wider CEE region some relief after the morning sell‑off. However, the market did not have too high expectations from yesterday's meeting due to geopolitical uncertainty and waiting for the official inauguration of the new government in Hungary. EUR/HUF closed at 364, and in particular, the front of the IRS curve closed almost unchanged compared to the CEE region, which was still elevated at the end of the day. The market remains convinced that the NBH is in no hurry to cut rates over the next nine months, which is in line with our forecast.

This, together with the steps of the new government, should support further FX gains with 350 EUR/HUF in the middle of the year in our forecast. Incoming PM Peter Magyar is scheduled to travel to Brussels today to discuss the potential unlocking of EU funds, which could provide further support to FX and rates.

Frantisek Taborsky