FX Daily: Soft labour data holds back defensive dollar rally
FX
Yesterday's US interest rate reaction to softer labour market data highlighted a potential issue for the dollar's defensive rally. This week's re-pricing of the Fed's terminal rate has somewhat mitigated the impact, but the dollar remains vulnerable ahead of next week's US jobs data. Meanwhile, the ECB's stance on EUR/USD is a key factor in the currency's performance.
Authors
USD: A temporary calm in asset markets
Financial markets have experienced a brief respite, with precious metals rising, equity futures recovering, and Bitcoin attracting buyers. This calm may be attributed to the Federal Reserve's readiness to intervene. The one-month USD OIS priced one year forward has decreased by 12bp this week, indicating a potential lower end of the neutral range for the Fed's policy rate. Soft US labour market data, contrasting with the Beige Book survey, further supports this view.
The future of US tech stocks is uncertain. While longer-term, cyclically adjusted price-earnings ratios for the S&P 500 are near multi-decade extremes, the buy-side appears fully invested. Nvidia, a key player in the AI stock rally, is near significant support levels at $164-169, making it a critical watch.
The dollar's performance during the recent corrective period could have been stronger. The DXY rally to 98.00 may be sufficient for now, and further gains should be approached cautiously.
Today's focus should be on the University of Michigan consumer sentiment numbers, which have been rebounding since April. A surprise dip could negatively impact the dollar, emphasizing consumer reliance on stock market performance.
The market is also positioned long USD/JPY ahead of Japan's election on Sunday. The outcome will be known by Monday's Asia opening, promising volatility.
Chris Turner
EUR: ECB's stance supports EUR/USD rally
European Central Bank President Christine Lagarde's press conference yesterday indicated no imminent rate cuts in response to euro strength. She stated that the euro/US dollar has fluctuated within a range since summer, and the ECB has incorporated exchange rate appreciation into its baseline.
This stability, along with soft short-dated rates, has provided support for EUR/USD below 1.18. The level at 1.1770 has held, and further dollar selling at major fixings could occur if European buyers reduce their dollar exposure.
The ECB survey of professional forecasters at 10:00am CET today may offer insights, but mixed German data has already been released. December industrial production was weaker than expected at -1.9% month-on-month, yet the trade balance surprised positively.
The Swiss franc's strength as a safe-haven asset, driven by its current account surplus and net foreign asset position, could impact AUD/CHF if US tech stocks decline further.
Chris Turner
GBP: Dovish BoE decision surprises
The Bank of England's 5-4 vote to keep rates unchanged was more dovish than expected, shifting market expectations to a potential March cut. However, the market struggles to price two 25bp cuts this year due to political considerations. A leadership challenge to PM Keir Starmer or a leftward policy shift could impact the Gilt market and delay the BoE's easing cycle.
Despite the dovish communication, 30-year UK Gilt yields rose. Sterling is expected to withstand pressure, with EUR/GBP finding support at 0.8670/80. The bias over the next month is towards 0.88, as political pressure on Starmer and data supporting a March BoE rate cut persist.
Chris Turner
CEE: Central bank decisions and market reactions
The Czech National Bank and National Bank of Poland had busy days yesterday. The CNB's inflation data, decreasing from 2.1% to 1.6% year-on-year, initially repriced rates before the decision. The 3.50% rate remained unchanged, with a hawkish forecast initially, followed by a dovish tone from the governor, confirming rate cut discussions.
Given the market's inability to anticipate two cuts soon, EUR/CZK peaked in the range 24.350-400. This can be considered a peak and a reversal, with 24.250-300 as a fair range for now. Further details from the CNB analyst meeting today will be crucial.
The National Bank of Poland's press conference offered limited new information. The governor's March rate cut suggestion aligns with forecasts, but inflation is expected to fall further than the NBP's guidance. EUR/PLN approached 4.230 but remained within the current range, with no game-changing developments expected.
Frantisek Taborsky
