FX Daily: A Busy Week Ahead

US data is in focus this week. We expect payrolls again above 100k, but the dollar is still embedding plenty of positives, and we maintain a preference for fading new USD rallies. Elsewhere, we don’t expect the Sintra forum to deliver any dovish tilt by the ECB ahead of a key CPI test on Thursday. We still expect EUR/USD to climb back to 1.150 in July.

In the run-up to Thursday’s US jobs report, consumer confidence, JOLTS, ADP and ISM manufacturing will set the tone

USD: Bullish momentum can keep easing

Markets appear uncertain about the latest US-Iran re-escalation. Despite the exchange of military strikes, oil has not seen a meaningful bounce, with investors sticking to the optimistic stance that has worked over the past month. As usual, the tipping point would be any disruption to Strait of Hormuz flows, especially given the limited buffer from heavily drawn reserves.

The dollar rally showed signs of fatigue in the back end of last week, and we think it may require some hawkish data inputs this week to avert further slippage. Naturally, any repricing of Gulf risk would provide a clear bullish USD catalyst, given the added flexibility in hawkish Federal Reserve repricing.

But barring that, all eyes will be on the US data calendar this week, alongside Friday’s speech in Sintra from Fed Chair Kevin Warsh. In the run-up to Thursday’s jobs report, consumer confidence, JOLTS, ADP and ISM manufacturing will set the tone. Ultimately, the key directional catalyst will be June’s payrolls, which we expect to come in above 100k for the third consecutive month (our call is 110k, consensus 115k). That should put a floor on rate expectations, but should equally be insufficient for markets to price in two Fed hikes by year-end. Incidentally, we are wondering how long markets will be able to ignore the gravitational pull on front-end rates from much lower oil prices.

One potential USD downside risk to consider this week is the Supreme Court ruling on the firing of Fed member Lisa Cook. That could reignite some Fed independence concerns, which could weigh substantially on a dollar that is heavily relying on the ‘re-basement’ trade at the moment.

All things considered, a test of the May 2025 102.0 high in DXY remains a risk. But we feel the dollar has embedded quite a lot of positives of late, and we retain a preference for fading any new rally from here.

EUR: Sintra shouldn't deliver dovish surprises

The European Central Bank's Sintra forum runs from today to Wednesday. While it has at times been used to signal shifts in stance, we do not expect President Christine Lagarde to do so in today’s opening remarks. Her recent comments to EU lawmakers carried some dovish tones, but other Governing Council members have largely validated market pricing for another hike this year. It would be surprising for her to deviate materially, especially ahead of Wednesday’s June flash CPI.

Our macro team looks for slightly above-consensus inflation at 3.1% headline and 2.6% core. That would point to a stalling trend, but not one that allows the ECB to ease its guard. The preference emerging from the many ECB speakers this week may well be to keep markets leaning toward a hawkish bias so that inflation expectations remain in check. Our call is another hike in September.

EUR/USD still faces downside risks from any new USD bull revamp, but a broadly hawkish tone in Sintra can offer some help on the margin. We remain of the view that the downside can be limited to 1.130, and that we’ll start to see a gradual recovery towards 1.150 in July.

GBP: Very resilient

Sterling continues to show resilience ahead of changes in the UK government. GBP rallied after Labour MP Wes Streeting endorsed Andy Burnham last week, which we interpreted as markets favouring the prospect of the more centrist Streeting as Chancellor.

In recent days, however, Energy Secretary Ed Miliband has emerged as a frontrunner for that role, yet the pound has held on to its gains. This suggests either that markets had been pricing a smoother transition via a Burnham ‘coronation’ rather than Streeting becoming Chancellor last week, or that they do not see material risks of fiscal slippage under Miliband.

In any case, we continue to see upside risks for EUR/GBP. Our short-term fair value model indicates modest undervaluation (around 0.4%), political risk may resurface, and pricing for 25p of Bank of England tightening still appears too hawkish in our view.

We continue to target a move back above 0.870 in EUR/GBP this summer.

CEE: FX pressure returns as disinflation keeps rates on hold

Last week in the CEE region was marked by oil relief and a stronger US dollar. The result is an outpricing of most rate hikes in Poland and the Czech Republic, but also some pressure on weaker FX. EUR/PLN hit its highest level since the start of the US-Iran conflict, and EUR/CZK is back to levels seen in early June, when the Czech National Bank began discussing rate hikes publicly.

This week, attention will be on Tuesday's inflation figures in Poland for June. We saw a significant downward surprise in May, mainly due to food prices, and our economists now expect a decrease from 3.1% to 2.9% largely as a result of lower fuel prices. This should confirm that National Bank of Poland rates will remain unchanged this year.

On Wednesday, we will see the PMI figures for June in the CEE region.

On Friday, Turkey will publish June inflation. We expect monthly inflation to moderate further to 0.8%, resuming a downtrend in the annual figure to 31.9% from 32.6% a month ago. This would be driven by unprocessed food prices thanks to a recovery in agricultural production and favourable rainfall so far this year, while the rapid decline in oil prices is also supportive for energy inflation.

Weekend headlines from the Middle East suggest a mixed opening, which, together with a stronger US dollar, suggests further pressure on CEE currencies. EUR/PLN could test 4.290 again for further upside, but we believe 4.300 should be sufficient resistance for now.