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The US dollar began the week on the entrance foot because of some defensive positioning forward of tomorrow’s tariff announcement. Barring knowledge disappointment (JOLTS and ISM manufacturing), there’s a case for the greenback to inch a bit larger once more right now. Hawkish ECB headlines push CEE currencies weaker, however the primary driver ought to nonetheless be US tariffs.
USD: Information Checks Earlier than Tariffs
The foreign money market caught up with the tariff risk initially of this week, with the greenback stronger throughout the board, the USD/JPY supported, and high-beta currencies underneath strain. Once more, the massive underperformers have been AUD and NZD, probably on the view that China will stay an enormous focus of US protectionism.
In Australia, the Reserve Financial institution of Australia stored rates on maintain in a single day as anticipated. AUD responded to the rally initially, however this morning was not far off from yesterday’s shut.
Regardless of yesterday’s strikes, the greenback has loads of room to rally ought to tomorrow’s tariff announcement shock on the hawkish (risk-negative) aspect, however stays susceptible to data-led draw back strain.
The US macro calendar may have an enormous say on right now’s FX strikes, but when we don’t see any knowledge shock, we’d not combat the greenback’s tentative restoration, as the most recent feedback from the US administration are quelling hopes for a lenient tariff announcement tomorrow. We might see DXY transfer above 104.50 earlier than tomorrow’s massive announcement.
JOLTS job openings for February are anticipated to indicate a reasonable decline to 7.6 million right now, with some focus additionally on the layoff figures. The ISM manufacturing index for March is predicted to drop again beneath 50.0, mirroring the deterioration in sentiment within the sector, given tariff uncertainty. For context, our US macro staff has lately revealed a producing outlook.
EUR: CPI Can Hold Markets Dovish on ECB
EUR/USD traded briefly beneath 1.080 yesterday earlier than revering later within the session. The euro stays moderately resilient to the entire tariff story anyway: regardless of the EU being among the many largest victims of this week’s spherical of tariffs, European currencies are faring a lot better than China proxies or CAD.
What additionally could have helped the euro is a Bloomberg report suggesting that extra ECB officers are prepared to simply accept a pause in April. There’s a risk the ECB tipped the media as policymakers had been uncomfortable with markets pricing in over 20bp of easing for the April assembly yesterday morning. The ECB in all probability desires to keep away from a state of affairs the place it’s led by market pricing to take a choice (lower) with the choice (maintain) being delivering a blow to an already turbulent bond market.
Anyway, the implied likelihood of a lower as of this morning continues to be excessive (74%). We’ll see what the flash CPI report for March tells us right now, however the indications had been modestly dovish from Germany yesterday and the consensus is for a decline from 2.6% to 2.5% in core eurozone inflation.
We stay usually cautious about following any EUR/USD rally into the tariff occasion and as a substitute see principally draw back dangers, barring any significant US knowledge shock. We nonetheless suppose a transfer to 1.070-1.073 will be on the playing cards within the coming days if the US goes forward with an aggressive tariff plan.
PLN: Ready for the Dovish Sign
March inflation in Poland, launched yesterday, shocked to the draw back once more with an unchanged studying at 4.9% year-on-year, the identical degree as in January and February. But, March inflation is predicted to be this yr’s peak, which, as we will see, got here in decrease than anticipated.
Core inflation can also be displaying some indicators of easing with a drop to three.4-3.5% in our calculations. Extra curiously, this comes within the week of the Nationwide Financial institution of Poland assembly. It’s unlikely that the Nationwide Financial institution of Poland will lower charges this week. Nonetheless, what may very well be fascinating for the markets is that if one of many dovish council members proposes a charge lower.
Charges have been unchanged for a yr and a half. That is why this week’s assembly might carry a breakthrough.
Inflation is clearly on a decrease path than within the March NBP projection, and the July projection ought to replicate this. The beginning of the speed lower cycle is approaching, with the primary lower anticipated in July and potential for a 100bp discount in Polish charges by the tip of 2025.
The market is already pricing in 100bp this yr, with the primary lower of 50bp in July. So the market is already in our baseline state of affairs with extra cuts early on. Nonetheless, the speed lower proposal would have signalled significance to the markets, and we will worth in additional cuts even when they don’t seem to be delivered later.
Thus, Wednesday’s assembly creates draw back for the zloty. Yesterday’s contradictory course of PLN charges vs EUR already factors to a weaker foreign money, partially on account of hawkish headlines from the European Central Financial institution. We are able to thus look above 4.20 EUR/PLN.
CEE: Hawkish ECB Drives Weaker FX
Within the Czech Republic, the ultimate GDP figures for the fourth quarter of 2024 can be launched right now, probably resulting in revisions within the breakdown. Moreover, the area will see the discharge of PMIs throughout varied sectors, which we consider ought to enhance sentiment. The March state finances outcomes for the Czech Republic may also be launched later right now.
Yesterday’s headlines a couple of hawkish ECB and the potential for a pause in April despatched a detrimental sign for CEE currencies, resulting in a tightening of interest rate differentials after per week of motion in the wrong way. CEE charges proceed to observe the US market, indicating weaker FX within the area regardless of our expectations yesterday. Nonetheless, the important thing occasion this week can be tomorrow’s announcement of reciprocal tariffs by the US administration, which is able to present additional course.
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