FX Daily: Fed Pricing And Tech Indigestion Bolster Dollar

(MENAFN- ING) USD: Fed pricing and risk-off mood to keep the dollar bid

Friday saw one of the cleanest and broadest dollar advances in quite a while. The core driver of the move was the strong US jobs report, which has raised expectations that this year's energy inflation shock is landing on fertile ground for second-round effects. The market is pricing close to 30bp of Federal Reserve tightening this year and 50bp of tightening by the second quarter of 2027.

At some point, that expected tightening will be too aggressive, but we cannot see that story being unwound this week. This is because it is another week for US price data, where the May headline CPI reading is expected to push through 4% year-on-year, and PPI final demand should remain near 6% YoY. We are now also in a Fed communication blackout period ahead of the 17 June FOMC meeting, meaning there is little to no scope for the Fed doves to push back against this pricing. In fact, we see the dollar staying bid into that FOMC meeting, given the market expects the central bank to remove its implicit easing bias.

At the same time, growing expectations of Fed tightening have caught an investor base overweight equities and overweight emerging markets. As we discussed in an article on Friday, it looks like investors might be selling off benchmark tech names to clear room in portfolios for Friday's $75-85bn SpaceX IPO. There could also be an issue of indigestion here as well, given that Alphabet recently tapped the equity market for $85bn, and OpenAI and Anthropic also plan to IPO in the coming months. We see the Swedish krona and the Israeli shekel as the most tech-sensitive currencies in the G10 and EM spaces, respectively.

An unwind of risk assets and especially an unwind of emerging market positions is normally dollar-positive. This probably adds weight to US Treasuries as well, given that emerging market nations (and presumably Japan again sometime) will be liquidating Treasuries for FX intervention operations. One further source of dollar selling this week could come from Korea's National Pension Service. In exceptional times, it can increase its benchmark 15% hedge ratio on foreign assets and has said that it is doing so today. As of April, it held over $400bn of foreign equities and bonds – a big chunk of which is presumably in the US.

The geopolitical backdrop is also shifting dollar-positive, with most surprised that Brent is not trading even higher now that Iran and Israel are directly exchanging fire.

DXY should stay bid and looks biased to test resistance in the 100.25/65 area. The dollar's recent strength is a reminder that cyclical rather than structural factors continue to dominate.

Chris Turner

EUR: ECB to provide some rearguard support for the euro

EUR/USD was hit hard on Friday as the dollar surged across the board. This increases pressure on the European Central Bank to sound hawkish this Thursday when it is widely expected to raise its deposit rate 25bp to 2.25%. A hawkish-sounding ECB is our call, and one which will maintain the view that it will hike again in September when it has a new round of forecasts.

On the activity side, we have already seen a weak batch of German factory orders data for April today, and the risk is that eurozone manufacturing activity data now starts to deteriorate after hoarding/inventory building earlier this year around the uncertainty of the Gulf conflict.

With energy prices starting to turn bid again, expect EUR/USD to stay offered and 1.1500 to remain under pressure. At this stage, we probably think support in the 1.14/15 region has a chance of holding this summer, but it will remain pressured while the market explores the idea of a Fed tightening cycle.

Chris Turner

GBP: BoE will try to avoid tightening

It looks as though the Bank of England will try to avoid tightening this year. The market expects relatively little of the Bank this summer, but does price 21bp of tightening at the September meeting. Friday's release of inflation expectations data amongst the corporate community also gives the BoE some confidence that second-round inflation effects are less likely.

In theory, EUR/GBP should be trading higher if the BoE is dragging its feet on tightening at a time when the ECB is about to hike and the data is prompting a rethink on the Fed's position. Equally, sterling is generally seen as a pro-risk currency with a large financial sector, meaning that it generally underperforms in a risk-off environment.

Given what should be a hawkish ECB meeting this week and a vulnerable equity environment ahead of large forthcoming supply, we favour EUR/GBP making a move back to 0.8680, while GBP/USD can test 1.3300 and has outside risk to 1.3200 this week.

Chris Turner

CEE: Zloty seems most exposed amid risk-off mood

Global headlines and hawkish US repricing continue to drive the regional story, while the busy CEE calendar is having only a limited impact. In the Czech Republic, the release of today's May industrial production data comes after mixed signals in recent days ahead of the June Czech National Bank meeting. Recent board comments suggest the meeting remains live – meaning that policymakers haven't ruled out a move – and we may hear more this week before the blackout period begins next week.

In Hungary, tomorrow's May inflation release should confirm that low inflation remains unchanged at 2.1% YoY. With the National Bank of Hungary meeting in two weeks, we expect a 25bp rate cut, and Tuesday's print should reinforce current market pricing.

On Wednesday, the final Czech inflation print should confirm a decline to 2.1% YoY, although the focus will be on core inflation, which we expect to stay at 2.8-2.9%.

On Thursday, the Central Bank of Turkey is expected to keep rates unchanged at 37%. The bank has signalled that policy will remain on hold for an extended period, which we expect to be reflected in this week's forward guidance, given the US-Iran conflict.

The CEE market saw strong hawkish repricing last week, not only due to Friday's US job data. Market pricing has returned to almost three rate hikes in Poland and almost four rate hikes in the Czech Republic in the one-year horizon. Despite the support of higher local rates, a stronger US dollar is, however, setting the direction for FX in CEE. The region is following the EM sell-off, erasing gains from the previous days. At the same time, the risk-off mood coming from the global equity and rates markets suggests more pain for the CEE region in the days ahead. At the moment, the Polish zloty appears to be the most vulnerable currency in the region, given the dovish National Bank of Poland story, with scope to test the upper end of its current 4.225–4.265 range.

Frantisek Taborsky

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