FX Daily: US Inflation To Offer Some Support To USD Today

The dollar has handed back most of last week’s gains on the back of a rebound in risk sentiment, also helped by further declines in energy prices. But we expect a slightly hotter-than-expected 0.3% MoM US core CPI print today to offer the dollar some support. We see some stabilisation in EUR/USD for the remainder of this week.

USD: AI trade bounces back

The dollar has given back most of last week’s gains as global equities rebounded and oil prices extended their decline at the start of this week. Despite the 4% drop in Nvidia stock, led by an investigation into CEO Jensen Huang, the Nasdaq and S&P 500 are now less than 2% below their 4 November closing levels. That sends a rather strong signal that last week was a bout of jitters rather than the start of a bigger downturn.

A further improvement in risk sentiment should strip the dollar of the small residual gains from the selloff. But the macro story may incidentally work in the dollar’s favour, leaving risks for the greenback rather balanced, in our view, by the end of the week. We think today’s October core CPI will come in slightly above consensus at 0.3% MoM, offering a bit more support to front-end USD rates, which have also crawled back higher as sentiment has stabilised. We expect headline CPI at 0.3% MoM too, in line with consensus (YoY figures are not published this month due to last year’s government shutdown).

The MoM increase is consistent with the Fed meeting its inflation target of 0.17%. Barring a downward surprise today, it will therefore be hard for FOMC members to sound materially less hawkish simply on the back of the stock market troubles. Today’s long list of speakers includes Chris Waller and Michelle Bowman, considered among the most dovish voices, alongside Lorie Logan and Jeff Schmid, two of the most hawkish members.

EUR: Lower oil not enough for a rally on its own

We warned yesterday that EUR/USD was looking dangerously undervalued and called for an upward correction. We saw that materialise quite rapidly yesterday, and our models now show the pair has returned to the 1.5-1.7% undervaluation that prevailed before last Thursday’s equity selloff. While still cheap, French risk continues to play a role and argues against another fast tightening in the valuation gap.

At this stage, other market drivers need to turn in favour of EUR/USD to push the pair higher. Plummeting oil prices on the back of renewed Middle East optimism may offer limited further support on their own, with moves in short-term rate differentials likely to matter more. The risk remains that a further decline in energy prices prompts a larger repricing in ECB rate expectations relative to the Fed’s, especially as we expect today’s US CPI report to build a stronger floor for front-end USD rates.

For now, we struggle to see the EUR/USD rally extending much further this week and instead expect the pair to stabilise in the 1.120-1.1250 area. We retain a moderate positive bias into year-end, largely due to positive year-end seasonality and a tentative view that some French risk could temporarily leave the euro. Our year-end target remains 1.130.

NOK: Inflation endorses prolonged pause

Norway released October inflation data this morning. Headline CPI accelerated from 3.4% to 3.6%, marginally below the 3.7% consensus, while underlying inflation (CPI-ATE) slowed as expected from 3.0% to 2.7%. The still-elevated headline print points to some caution in moving away from Norges Bank's tightening bias, but CPI-ATE below 3.0% should prevent further rate increases.

Norges Bank has been one of the most reactive central banks to inflationary risk, even before the Iran conflict. With rates at 4.50%, policymakers are keeping the door open to more hikes if needed, while sending a clear signal that a prolonged pause is the baseline scenario. We agree and see further moderation in inflation in 2027 as favouring a transition to rate cuts earlier than most other central banks.

Markets are pricing around a one-in-three chance of another hike by March and 10bp of easing over the next year. The dovish reassessment on the curve, combined with the sharp decline in oil prices, has prompted a rebound in EUR/NOK. The pair is now within our 10.55-10.65 year-end target range.

CEE: Inflation is creeping up

Hungarian inflation rose from 1.6% to 2.0% in October, in line with NBH and market expectations, with core inflation also rising slightly. Nevertheless, Hungarian inflation remains the lowest in the CEE region and well below the NBH’s target. Inflation is expected to continue rising in the coming months, peaking slightly below 4% in the middle of next year before returning to the target. This should allow the NBH to continue with rate cuts in the second half of next year. As is the case elsewhere, energy prices remain the primary unknown, with Hungary remaining significantly exposed to this risk.

Later today, final Czech inflation figures for October will be released. The flash estimate last week showed a decline from 2.5% to 2.4%. The focus today is on the breakdown and core inflation, where we expect an uptick from 3.1% to 3.2%. Details of the CNB's new forecast will not be released until Friday, but the central bank will share its expectations for October in a commentary this afternoon.

Rates in the region saw another leg of a rally yesterday as the market priced out rate hikes from the curve, following a decline in energy prices. FX saw only limited gains, despite a global risk-on sentiment. Narrowing rate differentials and a persistently strong US dollar likely remain headwinds; meanwhile, the rally in rates suggests a weaker outlook for regional FX once the current stabilisation phase settles.