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Ought to Russia and Ukraine in the end attain a peace deal, the US dollar might be due one other average correction – however for now, markets are missing tangible bearish USD drivers and we predict the greenback might hold rebounding immediately. In Australia, the RBA lower charges as anticipated, however the Australian Dollar is benefitting from a hawkish tone on future easing
USD: Fading Bearish Momentum
Our baseline view for this week has been that the greenback correction has run its course, and we nonetheless favor chasing a USD rebound towards different G10 currencies. There’s admittedly some residual room for a risk-on/dollar-off transfer as soon as a possible Russia-Ukraine peace deal is agreed, however markets are largely pricing it in at this stage and there are not any ensures for now that it’s going to enable to cost out longer-run geopolitical threat.
In the present day, markets will stay centered on any developments on the US-Russia bilateral talks on Ukraine, however barring a significant breakthrough, the optimistic push and relative upbeat threat sentiment might stall or fade within the subsequent couple of days and the greenback can proceed to get better some floor.
Additionally on the positioning facet, there’s some proof that the greenback longs are barely much less stretched. CFTC USD positioning versus G10 currencies excluding SEK and NOK (which aren’t reported) has inched again decrease to a seven-week low, albeit remaining above +20% of open curiosity.
Macro developments will doubtless play a secondary position this week, except for tomorrow’s FOMC minutes. In the present day’s Empire Manufacturing index and TIC flows out of the US ought to have restricted market impression.
EUR: No Assist From Joint Defence Spending
The continued dialogue amongst EU leaders for a joint fund for protection spending is unlikely to drive a lot help for European currencies. That’s as a result of the set off is US President Donald Trump’s risk to reduce navy help for NATO borders in Europe, which is hardly a net-positive improvement for native currencies.
It’s equally far-fetched to hope any such EU coordination on frequent spending might be replicated on the fiscal facet to counter US protectionism. The eurozone’s structural unpreparedness to face the financial penalties of Trump’s tariffs continues to kind the idea of our bearish EUR view. Market pricing on the European Central Financial institution is round -75bp for year-end, however we predict 4 extra cuts this yr (to 1.75%) might be warranted.
EUR/USD has obliterated the unfavorable threat premium associated to US tariffs. Bear in mind in mid-January that amounted to three% of undervaluation, in accordance with our short-term truthful worth mannequin. Plainly the Ukraine-Russia peace negotiations have offset the tariff risk in FX. Nonetheless, the latter doubtless have extra tangible implications for the ECB, the financial system, and by extension the euro, and we, due to this fact, favor a decrease EUR/USD. Our forecast for the top of this quarter is 1.02.
AUD: A Hawkish Minimize by the RBA
The Reserve Financial institution of Australia lower charges for the primary time in 4 years this morning, matching consensus and market expectations. The 25bp discount was accompanied by some fairly hawkish remarks by Governor Michele Bullock, each within the assertion and within the press convention.
Bullock appeared to deal with pushing again towards the dovish repricing within the AUD curve, reiterating that the main focus stays firmly on inflation threat. That method is in distinction with these of different developed central banks (together with the neighbouring Reserve Financial institution of New Zealand, which ought to lower 50bp this week) which have shifted in direction of development considerations.
Markets are pricing slightly below two cuts in Australia by the top of 2025, whereas we’ve a barely extra dovish forecast with one lower per quarter (three in whole). Bullock’s cautious tone on additional easing has allowed AUD to counter the USD rebound this morning. That mentioned, we doubt markets are able to shift expectations to just one RBA lower this yr, and AUD’s excessive publicity to the commerce story and threat sentiment might shortly overcome any short-term advantages from the RBA’s tone immediately.
We nonetheless suppose a return to 0.62 in AUD/USD is warranted by the top of March, with additional draw back dangers within the second and third quarters when US protectionism might intensify.
CEE: Ukrainian Story Stays the Essential Driver for the Area
In the present day’s calendar within the CEE area would not have a lot to supply and we should wait till later within the week for extra fascinating knowledge prints. The prospect of a Ukraine deal might proceed to be a significant driver for markets with immediately’s assembly of US and Russian reps in Saudi Arabia. In Hungary, the annual convention of the ruling Fidesz get together begins immediately, the place we might probably hear fiscal plans for this yr and subsequent earlier than the overall election.
The US market was closed yesterday, and CEE was fairly muted at the beginning of the week, with FX basically unchanged. Nonetheless, charges – after an preliminary transfer increased following increased EUR charges – ended barely decrease within the Czech Republic and noticed a drop in Hungary. Right here is an apparent bias marketplace for CEE to be acquired, doubtless coming from the Ukraine story. Nonetheless, as we mentioned right here yesterday, the result’s a tighter charge differential – which ought to cease the present FX rally later, and even push for some weak spot as soon as the constructive sentiment fades.
Disclaimer: This publication has been ready by ING solely for data functions regardless of a specific person’s means, monetary state of affairs or funding aims. The data doesn’t represent funding suggestion, and neither is it funding, authorized or tax recommendation or a proposal or solicitation to buy or promote any monetary instrument. Read more
