FX Daily: Dot Plot Revision Can Support USD

(MENAFN- ING) USD: Cautious hawkish re-assessment by the Fed

The dollar's slip yesterday appeared more a symptom of position squaring ahead of today's FOMC risk event rather than a signal of further optimism on geopolitics. It has been a rare case of dislocation between oil prices and the dollar since the Iran conflict started, perhaps hinting that markets are – at least for this week – shifting their focus to the central bank reactions, also considering few signs of an imminent de-escalation.

We preview today's FOMC meeting here. The Fed will keep rates on hold, but the risks are clearly of a hawkish revision in the Dot Plot projections, with the median currently signalling one rate cut by year-end. That matches current market pricing (-27bp for December), and the dollar should benefit from a revision to no cuts in 2026. In terms of dovish risks, reintroducing“downside risks” mentioned in the statement's section about jobs could help markets maintain expectations for a cut on a dual-mandate rationale.

What appears less likely is strong statements by Chair Powell on the inflation-growth implications associated with the conflict. The geopolitical and commodity market conditions are still too volatile to venture into guidance in that sense.

Markets will need to read into new projections to infer some policy response framework, but we think rate expectations will remain fluid and tied to oil market swings even after this Fed meeting. Accordingly, we expect a positive, but short-lived response by the dollar, with geopolitical headlines quickly back in the driver's seat.

Francesco Pesole

EUR: Fed Dot Plot in focus as EUR/USD risks a pullback

Today will be about war developments and the Fed for EUR/USD. As discussed above, we see upside risks for the dollar from a hawkish Dot Plot revision, and EUR/USD may pull back to the 1.150 handle.

The ECB meets tomorrow (here is our preview ) and might need to take into account yesterday's very weak ZEW 'expectations' survey, which fell to an 11-month low on war-related fears. Unlike the Fed, the ECB only has an inflation mandate, but history tells us the economic outlook plays a major role too.

Perhaps concerns about the growth hit and the temporary nature of some energy shocks could prompt some pushback against markets' ultra-hawkish bets. We do see some dovish risks tomorrow, although the implications for the euro may not be huge given reduced sensitivity to short-term rate differentials of late.

Francesco Pesole

CEE: Rate hike bets are thinning out

The region has seen some relief over the last two days, with better global sentiment despite energy prices remaining elevated. While current oil and gas price levels will mean some additional inflation in the region, the market is likely assuming that the dark scenarios are not materialising for now. The market has thus reduced the number of rate hikes priced in since the start of the US-Iran conflict and just this week we have moved from around 2-3 hikes across the region to the current 1-2 hikes. Although the market is stabilising and liquidity is returning, it is of course not possible to rule out a re-escalation of tensions and the trigger of another sell-off under the pressure of another jump in energy prices, similar to what we saw last week.

However, for now, there is nothing else to do but go with the risk-on flow, and although we have already given all the rate cuts from our forecast in the CEE region, rate hikes still seem distant under current market conditions for us. We will see the Czech National Bank meeting tomorrow and the National Bank of Hungary meeting next week. In both cases, we can expect pushback against rate hikes and the market has an opportunity to receive rates here. At the same time, FX is more driven by risk-on and risk-off sentiment and, despite potentially narrower interest rate differentials, we should see some recovery unless we see further escalation.

Frantisek Taborsky

TRY and RON: Where spot can't move, forwards must go

On the managed currency side of the region, we have seen little movement in spot EUR/RON and USD/TRY since the start of the US-Iran conflict. In both cases, central banks are not in a position to afford additional inflationary pressures and, in line with our expectations, are keeping FX steady. In Romania, we expect inflation to jump into double digits in March, and in Turkey, we have already seen disinflation essentially stop before the conflict even started. Therefore, we do not expect any changes in the current approach of central banks to FX regimes.

In Romania, FX remains well below 5.100 EUR/RON and the question is where the liquidity of the banking sector has dropped. We saw record high levels of surplus at the beginning of the year and although the market is probably still in surplus, it is likely not far from balanced. FX forward implied yields remain elevated even after some relief, not far from the National Bank of Romania, where we cannot expect the central bank to be close to rate cuts, rather the opposite, and we will have to wait until the second half of the year.

A similar situation can be seen in Turkey, where USD/TRY remains on its usual upward trajectory and implieds have normalised slightly in recent days, but at the same time, the market here is more cautious about Central Bank of Turkey rate cuts and is pricing in any steps for the end of the year.

Frantisek Taborsky

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