FX Daily: USD Rally Getting Tired?

Risk sentiment remains shaky, but the dollar hasn't taken advantage of the latest correction in Asian equities. That may fit our view that USD is pricing in quite a lot of positives and faces downside risks, especially beyond the very near term. Elsewhere, markets may be growing some conviction that 162.0 is the new line in the sand for USD/JPY intervention.

USD: Testing rally resilience

The mix of risk sentiment and data inputs for the dollar has remained mildly USD-positive in the past 24 hours, but the dollar has inched lower – a potential sign that some bullish momentum is fading. Yesterday’s rebound in US equities proved rather small and short-lived, and another correction in South Korean equities this morning is hitting global equity futures.

On the data side, the message on personal spending was mixed. First-quarter data was revised sharply lower from 1.4% to 0.5% quarter-on-quarter, which clouded the strong (0.7% month-on-month) May print. At the same time, first-quarter GDP was revised higher to 2.1%, underscoring the strength of the AI growth push. May’s core PCE came in as expected at 0.3% MoM, leaving all the weight of setting the next big direction for rate expectations to upcoming payrolls (4 July) and CPI (14 July).

The equity story remains very central for FX at the moment, and indications of still-fragile risk sentiment in Asia make it challenging to call for a quick reversal of recent USD gains. However, the latest price action seems to endorse, to some extent, our feeling that a lot of positives are in the price for the USD. At least beyond the very near term, the case for a dollar correction is getting stronger.

Today’s US calendar is quiet, and the Fedspeak calendar only includes Neel Kashkari (a hawk) today. Yesterday, Austan Goolsbee struck a more neutral tone compared to hawkish-sounding comments earlier this week, while John Williams unsurprisingly sounded more dovish than the current FOMC consensus.

EUR: Stabilisation may continue

EUR/USD is searching for some stabilisation in the 1.1350-1.140 area. Inputs from the eurozone should remain quite secondary for the pair in the short term. Markets probably need a big CPI miss next week or broader market turmoil to price out the one hike left in the EUR curve for this year. Equally, the bar is set quite high to add back another hike. Most of the action in rate expectations is happening on the dollar leg, which should remain overwhelmingly dominant in EUR/USD.

Accordingly, we don't expect much of an impact from today's ECB inflation expectations from May. They are expected to inch lower on the back of lower energy prices and imminent ECB tightening.

While we may not have seen the bottom in EUR/USD just yet, our baseline view is that the 1.130 support can hold, and the pair will return above 1.150 this summer.

JPY: 162.0 new line in the sand?

Markets may be building some conviction that 162.0 in USD/JPY is the new line in the sand for FX intervention. This – alongside a softer USD environment – may help explain yesterday’s intraday drop after the pair touched a 161.95 peak.

Our current expectation is that 162-163 is the new intervention area, although the pace and the drivers of the next round of appreciation will determine the urgency and size of interventions.

The end of next week offers an opportunity for slightly lower liquidity around the 4 July US holiday (Saturday). If US payrolls are strong on 3 July, the Bank of Japan could indeed pull the trigger on new intervention. Our dovish Fed call makes us more optimistic that new FX intervention can have a more sustainable negative effect on USD/JPY, but timing remains very tricky; the market may well retain hawkish Fed expectations for a few more weeks, and Japan may be forced to intervene further than once more.

CZK: Hawkish CNB keeps support intact despite stronger dollar pressure

The Czech National Bank published the minutes from its June meeting yesterday, when it raised rates by 25bp to 3.75% and became the first CEE central bank to respond to the US-Iran conflict. However, the minutes suggest the board’s main concerns were rooted more in the domestic economy than in the global backdrop. While the headline message was that the hike does not mark the start of a new tightening cycle, the discussion showed a more nuanced picture. Karina Kubelkova voted for no change, preferring to wait longer given the end of the US-Iran conflict and the related disinflationary pressure. By contrast, some board members indicated that further hikes may be needed if domestic inflation pressures persist.

Overall, the minutes confirm that the CNB remains the most hawkish central bank in the region. Our baseline is unchanged rates for the rest of the year, but the bar for another hike is relatively low. Three more inflation prints are due before the August meeting, and another rise in core inflation above 3.0% could give the CNB a reason to hike again. Markets are already pricing one more hike, and we expect this to remain the case, with upside risk for front-end rates.

This is supportive for FX, although the koruna has come under pressure recently from a stronger US dollar and global risk-off sentiment. EUR/CZK broke above 24.250 yesterday and likely still has some upside. Despite the CNB’s hawkish stance, the rate differential has narrowed on the back of a more hawkish ECB story. Our model points to EUR/CZK around 24.250-24.300.

Still, a hawkish CNB should keep CZK supported, while our expected US dollar turnaround and a less hawkish ECB should add support from the global side, allowing EUR/CZK to move back below 24.150.