FX Daily: Looking For Stabilisation

Calmer markets are allowing several currencies to take a breather against the strong dollar. If sentiment keeps stabilising from here, data and Fedspeak should take over as primary drivers. Today, we expect decent US spending figures, but a muted core PCE. Our baseline view is that EUR/USD won’t break below 1.130.

USD: Core PCE may come in cooler than expected

The dollar seems to have halted its run on some risk sentiment stabilisation, but it’s still early to rule out another leg higher in the greenback. Any new signs of AI jitters could be the catalyst for more safe-haven-related dollar demand.

At the same time, our baseline view remains that we are not far from the peak in this dollar rally. This risk correction has shaved around 7bp off the Fed pricing for December, which is now 35bp. It’s a potential sign that the bar for a dovish repricing may not be that high. Our economists still expect no hikes by the Fed this year, which backs our bearish USD call for 2H.

Today, the US data calendar picks up again. Personal income figures for May are expected to come in at a robust 0.6% on the back of good retail sales data. However, the savings rate may keep dropping closer to all-time lows – a sign of growing stress for some consumers.

The other main release is the Fed's preferred measure of inflation, the core PCE deflator. Expectations are for 0.3% MoM, but we see risks tilted to a 0.2% print. That wouldn’t be enough to sustainably invert the USD’s momentum, but it could help build some resistance to more aggressive hawkish repricing in the swap curve.

Fedspeak also remains quite closely watched. Today, Bowman and Williams are due to speak. The former is arguably the most dovish FOMC member after Miran’s departure, and Williams is also a dovish-leaning voice. We could hear some pushback against aggressive expectations as they probably belong to the half of FOMC members who forecasted no hikes this year.

EUR: Looking for firmer ground

EUR/USD is stabilising after a long sell-off, with AI-related sentiment now being the primary driver of the pair. Further stabilisation in equities could see a slow return to 1.140.

Domestically, the German IFO printed above consensus yesterday, offsetting Tuesday’s poor PMIs, but markets have continued to gradually scale back some ECB easing. This was in line with the move in the USD curve and a spillover from the equity turmoil, as ECB speakers have so far offered a more hawkish tone relative to Lagarde’s Monday speech.

Our baseline view is that EUR/USD won’t break below 1.130, but that is contingent on risk sentiment continuing to stabilise.

PLN: Zloty weakness to persist as NBP stays dovish and global turns risk-off

The Polish zloty continues to underperform its CEE peers. Over the past two weeks, EUR/PLN has moved from its previous 4.230-4.260 range to levels above 4.290 yesterday, the highest since the start of the US-Iran conflict in March. As we discussed here previously, the zloty has become the region’s most vulnerable currency due to the dovish tone of the National Bank of Poland. Global factors have added to this pressure in recent weeks, with a stronger US dollar and weaker risk sentiment weighing on the currency. Overall, there is little to suggest an early turnaround in EUR/PLN.

In our models, levels around 4.290 have closed the gap between rates and FX that had been widening since mid-June, suggesting fair levels currently. The market has priced out almost all rate hikes and now expects rates to remain broadly unchanged over the next six months, with only about a 50% probability of one hike over the following year. This is significantly less than for comparable peers such as the Czech Republic or the broader EM space, excluding outliers such as Hungary or Israel with strong idiosyncratic stories.

For now, the NBP’s tone is unlikely to change, with the next potential trigger being the June inflation print next Tuesday. However, forecasts do not point to a significant upside surprise, while recent data, especially weaker wages, should keep the central bank comfortable. We therefore continue to see risks skewed towards a higher EUR/PLN, although 4.300 should remain strong resistance and help keep the move contained. Otherwise, further zloty weakness could prompt the NBP to reassess its current stance.

CEE: Stronger dollar puts FX under pressure

The strong US dollar is becoming a visible problem for the entire EM space, including CEE currencies. The risk of a Fed hike has long been one of the biggest risks for the CEE region, not only from an FX perspective but also from a central bank perspective. Weaker currencies obviously mean additional inflationary pressures for the significantly open economies of Central and Eastern Europe. At the same time, this is the last thing central banks want right now, when the second-round impact of higher oil prices in the last three months is still unknown. We should potentially see higher food prices across the region in the second half of the year due to higher fertiliser prices and a turnaround in global food prices.

At the same time, the market is reacting to falling oil prices and pricing out potential rate hikes in Poland and the Czech Republic, and increasing rate cut bets in Hungary. In the Czech Republic, the market is keeping one hike, in Poland about half a hike and in Hungary about 150bp of easing. While in Hungary we may see more rate cuts priced in, in the Czech Republic and Poland we see this as the minimum possible at this point.

Conversely, the pressure on FX may bring rate hikes back into play, although our baseline is no change in the Czech Republic and Poland this year. The increasing probability of a Fed hike also means an increasing probability of rate hikes from the CNB and NBP and fewer rate cuts from the NBH.