FX Daily: Global Bond Slump Not A Sustainable FX Driver

(MENAFN- ING) USD: Dollar rally may be unwound

Yesterday's dollar rally lacked a clear catalyst beyond the selloff in global long-dated bonds – including the high-profile UK gilts (more on GBP below). Rising debt concerns outside the US may have triggered some unwinding of abundant USD longs. Still, we doubt this will provide sustainable support to the dollar ahead of key data releases and imminent Fed easing.

Jobs-related data now carries even greater weight after Fed Chair Jerome Powell's de facto admission that employment risks have overtaken inflation concerns. Market attention may also sharpen on data beyond official payrolls, especially given potential credibility questions after Trump's appointment of a new BLS chief. Today's JOLTS report is therefore important. Job openings are expected to have edged lower in July, but we are still well above the seven million average for 2018-19, which could warrant major concerns. Changes in layoff figures could have a bigger impact. So far, the narrative points to job market stagnation after a few exceptional years; layoffs need to remain low to avoid a faster dovish repricing.

The Fed's Beige Book, also due today, will provide regional insights – particularly on tariff-related price pass-through. We'll also hear from hawkish-leaning FOMC voter Alberto Musalem.

We don't see a strong fundamental case for yesterday's dollar momentum and expect some downside risk for the DXY today as that move unwinds ahead of Friday's payrolls.

Francesco Pesole

EUR: Inflation supports the ECB's cautious stance

EUR/USD remains cheap according to our model, which places the short-term fair value around 1.190. While French geopolitical risk may keep the euro from rapidly reconnecting with stronger rate differentials, we think the impact of OAT underperformance on the euro has likely run its course – as discussed here .

Yesterday's slightly hotter-than-expected core inflation numbers (2.3%) in the euro area brought the two-year EUR swap rate back above 2.10%. The implied probability of an ECB cut by year-end is now only one in three. While we think that is too conservative, it may take some time for a dovish repricing and any negative euro impact to materialise, considering multiple reiterations by ECB officials that they are in a good place when it comes to rates.

It's quite likely that any potential policy comment by ECB President Christine Lagarde at an ESRB event today will reinforce this cautious stance. We think EUR/USD has some ground to recover after yesterday's drop, with a return above 1.170 quite possible in the next few days.

Francesco Pesole

GBP: Reaction to gilts selloff looks a bit overblown

The pound had a rough Tuesday as back-end gilt yields rose, with the 30-year hitting its highest level since 1998. It's important to note, though, that the long-dated bond selloff was happening across Europe yesterday, and gilts didn't underperform their peers. Yesterday's 0.7% rise in EUR/GBP highlights just how sensitive the pound is to yield increases, but we take a conservative view and don't expect the pound to fall much further on gilt moves alone.

While the rise in back-end yields is getting a lot of attention amid scrutiny of the UK fiscal situation, much of the increase is tied to higher inflation and hawkish repricing of Bank of England rate expectations rather than fiscal worries. Demand for extra-long-dated debt (like 30-year gilts) has been weak across developed markets, but a 10-year gilt auction attracted very strong demand, raising a record £14bn. That doesn't support the idea that fiscal concerns are outweighing inflation and BoE repricing in driving yields higher.

We're not optimistic on the pound as we still expect the BoE to cut rates by year-end (more here ), but the moves in back-end gilts don't seem dysfunctional and don't justify a persistent risk premium on sterling, especially given the UK government's likely fiscal consolidation plans. For now, we think EUR/GBP belongs below 0.870.

Francesco Pesole

CEE: Hawkish cut as forward guidance in Poland

The National Bank of Poland is likely to cut rates by 25bp to 4.75% today, in line with market expectations. The rate cut is supported by a better inflation outlook. On the other hand, last week's higher-than-expected draft state budget deficit is more likely to prompt a hawkish response from the central bank. Therefore, we are most likely to see a hawkish cut today, which could be indicated by the statement following the decision. Tomorrow's press conference will be key, where we should hear a cautious tone. Our economists recently lowered their expected rate cuts for this year from three to two (including today's decision), which is roughly in line with market pricing. However, some MPC members have already indicated that September's rate cut may be the last. Although this rhetoric may change later, for today's meeting and tomorrow's press conference, we see it as support for PLN. We therefore see a good chance for EUR/PLN to return below 4.250.

Yesterday's court ruling triggered some volatility in Turkey, where we saw a spike in bonds and FX implied yields, while USD/TRY spot appears unaffected. Still, the court's decision on 15 September should be more important for markets, but yesterday's headlines and reaction indicate current market nervousness. As we discussed earlier, we continue to prefer the spot market for these reasons, where the Central Bank of Turkey appears to have the situation fully under control and carry remains sufficient, while the bond market appears to be the most sensitive.

Wages for Q2 will be published in the Czech Republic, where we expect an acceleration from 3.9% to 4.3% in real terms, which is in line with the CNB forecast as well. However, the CNB's focus will mainly be on today's negotiations between the government and trade unions, which should decide on wage increases for public servants for next year. The government is proposing 5% or 7%, while the unions are demanding 10%. We are very likely to see 7%, which is significantly above the CNB forecast, and together with the previous increase in the minimum wage, it seems that the 5.5% for next year in the CNB forecast is out of the question. Therefore, we remain bullish on the CZK, and after yesterday's expected correction, 24.500 EUR/CZK may be an opportunity for new shorts here in our view.

Frantisek Taborsky

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