FX Daily: Volatile Truce

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USD: Fed minutes highlight dual risks

Higher‐beta and carry currencies have led the rebound against the dollar since the ceasefire announcement. Beyond their natural sensitivity to the equity rebound, FX investors may be positioning for a gradual return to conditions of lower volatility, which tend to favour carry and EM FX, alongside some stickiness in energy prices to which some high-beta currencies are positively exposed.

We suspect this preference for higher‐beta currencies over lower‐beta, more liquid alternatives such as EUR, GBP and JPY can persist as long as markets are not given a reason to question the de-escalation narrative. Iran said yesterday that the ceasefire had been violated, helping the dollar recover a small portion of losses. That serves as a reminder that the situation remains highly uncertain and that small bouts of re‐escalation are still possible even if the conflict moves towards a broader resolution.

On the macro side, the Federal Reserve minutes yesterday caused a small hawkish reaction – with swap rates now embedding only 7bp of easing by year-end after touching 15bp earlier yesterday. The main highlight of the minutes, in our view, was however the reinforcement of two-side risks stemming from the war, with faster cuts discussed as an option should job losses outpace inflation. We see room for dovish repricing in Fed expectations from here – a dollar negative.

Today, there are some US data releases to watch. February core PCE inflation is expected to come in close to 0.4% month-on-month, though it is largely pre‐war and therefore of limited relevance. Jobless claims remain interestingly low, and the question is whether a delayed pick‐up finally materialises in one of the coming weeks. Personal income figures are also pre‐war, and the third estimate of 4Q GDP should have little market impact.

Headline trading still dominates. Evidence that traffic through the Strait of Hormuz is picking up could add pressure on the dollar, but a more durable move would likely require signs that the ceasefire evolves towards a lasting arrangement. Otherwise, markets may start to grow nervous again once the two‐week ceasefire nears expiry.

Francesco Pesole

ECB: Sticky ECB pricing can help

This is not an environment for outright EUR strength given investors' preference for higher‐beta currencies. Still, European Central Bank pricing could give the euro more durable support than elsewhere. While falling energy prices have driven a dovish repricing in the EUR swap curve, markets continue to discount around 58bp of tightening by year‐end.

We doubt that a modest further decline in energy prices alone would be enough to push ECB pricing below 50bp. Rate cycles at the ECB are typically framed around two 25bp moves or nothing at all, meaning a material dovish shift would likely require explicit guidance rather than just lower oil prices.

With no permanent ceasefire in place and uncertainty around oil flows persisting, the ECB is unlikely to rush towards a decisively dovish narrative. That could prompt the euro to outperform other currencies (like USD) where pricing appears to be more flexible on the dovish side.

A jump to 1.180 seems a bit premature given lingering volatility in the Gulf, but sticky ECB hawkish bets favour a return to the 1.170-1.173 area in EUR/USD.

Francesco Pesole

GBP: Downside risks vs EUR

We struggle to see much downside potential in EUR/GBP following the drop to 0.870, which largely reflected sterling's higher sensitivity to the sharp equity rally.

As discussed above, EUR rate expectations may prove sticky, while Bank of England dovish repricing could come through more smoothly if energy prices keep declining. After all, the BoE was already ready to cut before the war began, and we have a conviction view that second‐round effect risks in the UK are significantly lower than in 2022.

Some BoE speakers (Governor Andrew Bailey, as well as Catherine Mann and Megan Greene) next week could offer markets an opportunity to trim pricing below one hike this year (currently 30bp), providing some bullish fuel for EUR/GBP. We still expect the pair to return to 0.880 this quarter.

Francesco Pesole

PLN: No change in rates for some time

The National Bank of Poland is likely to leave rates unchanged at 3.75% today. This is a meeting without a new forecast and the first meeting after the March rate cut. Some MPC members indicated before the meeting that rates will likely remain unchanged for a longer period of time and some mentioned that the March cut was the last. Attention will be on the Governor's press conference today, which will likely determine the central bank's further direction.

The market has priced out about one and a half rate hikes after the US-Iran ceasefire announcement and remains priced at less than 20bp at the one-year horizon. This is the lowest in the CEE region and rates pricing is quickly returning to normal. If the central bank confirms its tendency to wait longer and do nothing today and, at the same time, the geopolitical situation stabilises further, we should see some pressure on the remaining rate hike pricing, although the market will probably keep some optionality here. On the other hand, the government has aggressively entered the fuel market, which should keep inflation under control and stay roughly within the central bank's tolerance band. Our forecast is for rates to remain unchanged for an extended period.

EUR/PLN saw its biggest one-day fall in a year yesterday, erasing roughly half of the move up from pre-conflict levels. Still, EUR/PLN and the rest of the region are mainly driven by geopolitical headlines, and today's NBP meeting will have little impact. However, assuming that the risk-on sentiment continues and the US-Iran ceasefire holds, the zloty has further potential to erase previous losses, although reaching pre-conflict levels below 4.220 will take longer.

Frantisek Taborsky

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