The dollar’s strong rally this week is firmly rooted in a shift in short-term rate dynamics, driven by hawkish Fed rhetoric and hotter inflation. That makes it harder to argue for a material rebound in EUR/USD, which may instead test 1.10 should upcoming data releases offer the dollar extra support. For now, we don’t see the conditions for a break below 1.10.
EUR/USD could test 1.10 if upcoming data provides further support for the dollar.
USD: Hawkish skew ahead
The combination of hawkish Fedspeak and a US CPI beat earlier this week continues to pay dividends for the dollar. DXY is now back at Liberation Day (April 2025) levels, with real front-end rate differentials continuing to fuel strong dollar momentum. Importantly, this remains a rates-driven move, with contained excessive USD strength relative to short-term fair value currently built in.
In our estimates, stretched undervaluation vs USD is only visible against the euro, consistent with the French-related premium, and SEK, which tends to underperform fundamentals during hawkish repricing as both an activity currency and a low yielder.
This environment is also preventing high-beta currencies from drawing any benefits from the extension of the equity rebound. The resilience to both Nvidia’s idiosyncratic losses and the repricing higher in interest rates is sending a rather strong signal of solidity in the AI trade at the moment.
We continue to see upside risks for the dollar in the coming days. The Fed's Chris Waller has put a 50bp December move on the radar, and that should keep markets biased towards hawkish interpretations of incoming data. December pricing remains at 28bp, leaving scope for further adjustment. Today’s home sales data are unlikely to matter, but tomorrow’s PPI will. That may be the catalyst for another USD leg higher.
EUR: ECB members unlikely to match Fedspeak
If, on the other side of the Atlantic, Chris Waller – previously considered dovish-leaning – opened the door to larger hikes, in the eurozone a hawkish-leaning voice, Gabriel Makhlouf, called for greater caution on tightening yesterday, stressing price pressures remain contained to energy for now.
That contrast neatly captures the current EUR/USD story. The pair's two-year swap rate differential has widened by around 15bp over the past five sessions, and we think the scope for further repricing is greater in front-end USD rates than EUR rates in the near term.
That leaves EUR/USD at material risk of testing 1.100 in the coming days. We expect that level to offer relatively solid support, not least because the pair is already trading at a nearly 2% discount to our short-term fair value. A decisive move below 1.100 would probably require markets to seriously entertain a 50bp December hike. That looks like a stretch for now.
RON: Elevated inflation will keep the NBR unchanged for a longer
October inflation data for Romania was released this morning – the final set of figures from the CEE region to be published in recent days. Headline inflation rose from 6.6% to 6.9%, in line with market expectations. Inflation is expected to remain at these levels until the end of the year, only beginning to decline next year. NBR is set to make a decision on interest rates today. However, given the current inflation profile, no changes are anticipated. Rates are expected to remain unchanged at 6.50%, and we don’t expect change until 2Q27. In recent months, the NBR has provided very little forward guidance in its statements, so it would be a surprise to see anything new from the central bank.
The EUR/RON exchange rate has stabilised slightly above 5.340, following some volatility over the previous two months. Data for October indicates that excess liquidity in the banking sector fell from RON30bn to zero. Nevertheless, we expect a recovery in liquidity for the remainder of the year, driven by anticipated inflows of EU funds and the government’s recent FX issuance. The overall balance should return to surplus. FX implied yields have normalised significantly following the spike in October, though they remain slightly elevated. In our view, the return of liquidity to the system should push implied rates toward the lower bound of the NBR’s interest rate corridor, closer to 5.50%.
CEE: Energy rebound and stronger dollar keep FX under pressure
Poland returns to the market today following yesterday’s holiday-related closure, and we should see a significant catch-up in the rates market. Following a rebound in global energy prices, we observed a rise in rates across the CZK and HUF markets, roughly 5-8bp along the entire curve. At the same time, CEE FX has come under renewed pressure due to energy prices and the US dollar reaching new highs. EUR/PLN has returned to near its local high of around 4.420. EUR/CZK has reached its highest levels since mid-October, and EUR/HUF has moved above 365.
This aligns with our bearish view on CEE FX, and we maintain this bias. Aside from data releases and a central bank meeting in Romania, the regional calendar is empty today, leaving the market driven primarily by the broader global narrative. On Friday, we will see regional GDP data and the minutes from the CNB meeting, which could provide fresh impetus to the local story. Until then, however, the direction remains unchanged, and we may see further downside for CEE currencies.
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