FX Daily: Hawkish Fed Repricing Propels USD Higher

(MENAFN- ING) USD: Major break higher

The dollar seems to be gaining some serious short-term momentum. We had speculated yesterday that the Trump-Xi meeting could have yielded some positive headlines (perhaps also on Iran) that would have capped USD and lifted sentiment. It's been too little so far, and a turn lower in equity futures today alongside another leg higher in oil prices is allowing the dollar to benefit from the latest hawkish data and the resulting repricing higher in Fed hike bets.

After the very hot PPI on Wednesday, yesterday saw a sharp 1.9% MoM rise in import prices, driven by energy, but non‐petroleum prices also rose a solid 0.7%. Initial jobless claims edged up to 211k (from 199k), while continuing claims increased to 1.78m – still low levels, pointing to limited layoffs. Retail sales rose 0.5% MoM as expected, with higher fuel prices lifting gasoline sales (+2.8%) and solid gains in sporting goods and electronics (+1.4% each).

Overall, there is little evidence so far that higher fuel costs are curbing broader consumer spending, supporting a narrative of a resilient US economy rather than an increasingly negative impact on RoW activity from higher energy prices.

This morning, we'll await some more headlines from Beijing. Again, it's mostly anything on Iran or AI-related themes that can trigger some sizeable reaction in the FX market, the latter via the equity channel. We have suddenly broken above the late April highs in DXY, and it's still dangerous to call for a peak in the dollar, considering the lack of any progress in the Gulf. Risks are of a move to 100 unless some positive headlines start flowing in.

Francesco Pesole

EUR: Support from rate differentials has evaporated

We saw a pretty significant technical break in EUR/USD at 1.170, which seemed to rapidly pave the way for a test of 1.160 in the coming days.

While equities are the main driver of the pair, the moves in short-term rate differentials have been big of late. The EUR:USD two-year swap rate gap has widened 20bp from -80bp to -100bp in the past 10 days. That is now close to pre-war levels, essentially removing a key driver (hawkish ECB repricing vs the Fed) of EUR/USD resilience during the conflict.

Elsewhere in Europe, the pound dropped yesterday as markets priced in a greater chance of Andy Burnham entering the PM leadership challenge. The risk premium (EUR/GBP short-term overvaluation) is now 0.8%. It's starting to look material, but remember that previous instances of intense political/fiscal concerns saw 2%+ risk premium. Risks remain on the upside for EUR/GBP.

Francesco Pesole

PLN: NBP resists hawkish pricing but risk of hikes grows

Poland will publish the final April inflation figures today, which should confirm 3.2% and say more about core inflation, which will be published next week. Our estimates point to an increase from 2.7% to 2.9% YoY. We have seen several members of the monetary policy council in the media in recent days sending mixed signals. Although all are leaning towards rate stability, they admit some discussion of rate hikes in July with the new central bank forecast.

Though our economists expect another increase in inflation above 4% by the end of the year, the baseline rates remain unchanged. On the other hand, we see the National Bank of Poland as the most risky regarding possible rate hikes in the region, given the pace of inflation growth compared to peers and the rhetoric of central bankers. The market is pricing in roughly three rate hikes in the next 12 months and is slowly starting to outperform even CZK rates, which have typically led sell-offs in the region before, suggesting that the market is starting to lean towards our view of the NBP as the riskiest from a rate hike perspective.

FX remains largely ignored and the main focus is on the rates market, range-bound with EUR/PLN 4.230-260. For now, a stronger local story is missing and it still all depends on global markets. But the stronger US dollar and the central banks' efforts to fight hawkish market pricing suggest a move from the lower to the upper end of the ranges.

Frantisek Taborsky

CZK: CNB sending dovish vibes

The CNB will publish minutes of its last meeting last week, which showed an interesting discussion on rates, and the minutes may provide further insights. On the one hand, the governor confirmed that the central bank will discuss a rate hike at the next meeting. On the other hand, during the press conference, he brought several dovish arguments for why not to raise rates. The market has, since the last meeting, perceived the CNB more dovishly, but still prices in about three rate hikes in the 12-month horizon, similar to the NBP.

This morning, we also saw an unusual interview with the governor for local media, where there was also a discussion about fiscal policy, which sees some widening of the deficit this year. This could potentially support inflation, according to the governor, but again we hear similar dovish arguments as before, such as that the CNB rate is quite high above inflation or the ECB rate.

For our economists, the baseline remains no change, and at the same time, the prospect of lower inflationary pressures in the coming months, thanks to the base effect, keeps us confident that the CNB will remain calm for now. Similar to Poland, the currency has remained largely unchanged over the last few weeks in the EUR/CZK 24.300-400 range. The market is seeing some deterioration in global sentiment again this morning, which, together with a dovish central bank, should have led the currency to the upper end of the range.

Frantisek Taborsky

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