FX Daily: Trade deal adds to market euphoria

Markets have taken the news of a US-EU trade deal positively. The deal is largely as rumoured in the middle of last week and seems to follow a template of 15% baseline tariffs and a commitment to spending big on US goods and energy. The deal is better than the 30-50% tariff rates threatened over the last couple of months, although it is probably as bad as the universal tariff rates being discussed late last year. We still do not know what is going to happen to the pharmaceutical sector, where the results of a trade investigation may well be released later this week. In terms of big trade deals yet to be secured, the market will still be on the lookout for deals with Asia (South Korea, Taiwan, India) and perhaps anything new for Mexico and Canada, too.

European politicians will be hoping that this deal can bring some certainty to businesses and unlock much-needed investment. Investment intentions in PMI surveys will therefore be heavily scrutinised over the coming months.

Given that a deal close to this one was heavily rumoured last week, it may be no surprise then that FX markets have not done much overnight. However, there is a huge amount of macro data and central bank action this week, which we think can provide some support to the dollar. The US macro data includes jobs data (JOLTS Tuesday, NFP Friday), a likely bounce back in second quarter GDP on Wednesday and stickier inflation on Thursday (June core PCE), which should tick back up to 0.3% month-on-month. This should leave the majority of the Federal Reserve comfortable in their patient position on interest rates (FOMC meeting on Wednesday) and see a further pricing out of the prospects of a September Fed rate cut.

Once this week's data calendar is clear, it looks as though markets are pricing a quiet August. This should add interest to the carry trade, where one-week rates at 4.37% per annum do not make the dollar an ideal funding currency.

We continue to favour a period of consolidation for the dollar, where the DXY can grind back towards the 98.50/99.00 area, assuming the US data obliges.

Chris Turner

Dax futures are currently trading up 1.2% as investors welcome some clarity on trade. Whether this remains the final deal remains to be seen, but taken at face value, European corporates can now progress with some planning. This comes at a time when eurozone fundamentals are not that bad – high saving rates, lower inventories and the prospect of some powerful fiscal expansion.

The above probably supports EUR/USD at levels close to 1.20 by the end of the year, but our call on the next chapter is a corrective one. Here, we think Fed easing expectations can be scaled back over the coming months, but also that a 25bp rate cut from the European Central Bank in September is underpriced at just a 15% probability. Eurozone data this week may support such a view, where second-quarter GDP (Wednesday) is expected to come in flat after a 0.6% reading in the first quarter. And the eurozone July flash inflation print (Friday) is expected to dip under 2.0%.

With a speculative market already reasonably long euros and a 2% per annum cost of carry against the dollar to deal with, we do not see the case for EUR/USD to immediately push through the highs at 1.1830. Instead, we have a bias for EUR/USD drifting below 1.1700 and perhaps all the way to 1.1600 if the Fed continues to resist pressure to cut rates this Wednesday.

Chris Turner

EUR/GBP looks to be trading quite comfortably above April's spike high near 0.8735. A move up to 0.88 is not guaranteed, however, since this week's eurozone data could weigh a little on the euro. At the same time, sitting long EUR/GBP in quiet August markets is again carry negative and a very light UK calendar this week looks unlikely to provide the incentives to add to short sterling positions. Perhaps EUR/GBP can trade something like a 0.8700-0.8770 range this week.

GBP/USD looks more vulnerable. Here, we favour a retest of decent support at 1.3370, below which losses can accelerate – perhaps all the way to 1.3150 if the US data/FOMC event risk this week is dollar positive enough.

Chris Turner

Following last week's central bank meetings across the CEE region, this week will see the release of economic data and inflation figures. On Wednesday, the first GDP figures for the second quarter will be published in the Czech Republic and Hungary. In both cases, we expect some acceleration in quarter-on-quarter terms. While we are below market expectations in Hungary, we are in line with the market in the Czech Republic.

On Thursday, July inflation will be released in Poland – as always, the first of these releases in the CEE region. We expect a sharp decline from 4.1% to 2.8% year-on-year, close to the central bank's inflation target. We are in line with market expectations, but we can see a significant spread of estimates in the range of 2.6-3.1%.

On Friday, PMIs will be released, which should again show some improvement in sentiment in most countries.

The Czech National Bank's blackout period begins on Thursday, and we are likely to see more headlines from the bank's board in the coming days.

Markets continue to be dominated by US trade headlines, which, after the weekend, indicate a risk-on mood. We already saw this on Friday in Hungarian forint and Czech koruna trading, which reached their strongest levels against the euro since September and June 2024. Both currencies are also supported by hawkish repricing, where the Polish zloty is losing ground. Here, the rate differential has narrowed again to near May levels, when the central bank first cut rates.

Nothing should change here, and lower inflation figures should further support this trend. We remain bearish on PLN with 4.270-280 per EUR in our view. EUR/CZK, on the other hand, should continue to grind lower thanks to support from hawkish CNB comments this week. HUF seems most mixed to us at the moment, where weaker economic data supports more rate cuts, but the market is going in the opposite direction, and the currency is getting support from both higher market rates and positive global sentiment. We therefore have to capitulate on our bearish view here.

Still, the coming weeks should be more locally focused with next week's inflation print, which could again cool market pricing and the strength of the HUF. At the same time, we believe that positioning is already solidly long. In the short term, though, we may see further gains.

Frantisek Taborsky