The world of foreign exchange (FX) is a delicate dance, and today, we're diving into the heart of it. A delicate balance between inflation and currency values is about to be tested.
Let's start with the mighty dollar. The recent tech sell-off has given the USD a bit of a boost, suggesting it's regaining its safe-haven status. However, medium-term bearish sentiments might encourage traders to sell during any rallies. Today's US CPI report is expected to align with consensus, but here's where it gets controversial: the Federal Reserve's recent signals suggest they're not in a hurry to cut rates again. It's all about the job market now.
We don't anticipate any surprises in January's inflation data. Both headline and core CPI are predicted to show a 0.3% month-on-month and 2.5% year-on-year increase. This aligns with the Fed's latest hawkish stance, which has pushed the dollar into a short-term undervaluation. But here's the twist: this undervaluation indicates an upside risk for the greenback in the coming days. Yet, the market's recent moves suggest a strong inclination to sell USD rallies, leaving us wondering if a substantial recovery is on the cards.
There's a glimmer of hope for the dollar in the form of a positive reaction to the tech sell-off, hinting at a restored safe-haven value.
Moving to the Eurozone, the calendar highlights the second print of Q4 GDP, expected to remain at 0.3% quarter-on-quarter. No significant market impact is anticipated.
On the ECB front, Vice President Luis de Guindos will be making waves. Recent comments from other members have flown under the radar, with no clear dissent to the neutral stance. Few have commented on the euro's strength post-meeting, leaving rate expectations largely unchanged for now.
The short-term fair value of EUR/USD has dropped to 1.165, widening the overvaluation gap. We're hesitant to predict a complete fill-up of this gap, despite some downside risks for the pair.
In Norway, the krone had a stellar week before yesterday's partial correction due to the equity sell-off. The jump in Norwegian CPI has led markets to rule out any rate cuts by Norges Bank this year. We believe this is premature, as inflation can be volatile. If it returns to 3.0% in the coming months, a rate cut this summer could become the new baseline.
From an FX perspective, it's tricky to counter NOK's strength just yet. Unlike EUR/SEK, our valuation model suggests EUR/NOK is at fair value due to the hawkish repricing of the NOK curve. A dovish event is needed to dent NOK's momentum, which might not happen until new CPI data is released next month.
Until then, if risk sentiment stabilizes, NOK can gain support from its attractive rate profile. We favor NOK over SEK in the near term.
In Central and Eastern Europe (CEE), the focus is on further rate cuts. Hungary's lower-than-expected inflation has opened doors for rate cuts at the National Bank of Hungary's February meeting. Meanwhile, Turkey's inflation report suggests rate cuts are still on the table.
Today, Poland and the Czech Republic are in the spotlight. In Poland, January inflation is expected to decline from 2.4% to 1.9% YoY, in line with market expectations. However, Polish inflation has surprised on the downside recently, creating risks for today's data release. Recent comments from the National Bank of Poland council suggest a March rate cut to 3.75% is likely unless today's inflation shows a significant upward surprise.
In the Czech Republic, we'll get a breakdown of January inflation, which could reveal the strength of inflation in sensitive parts of the basket. The central bank's minutes could provide further details and support dovish pricing, especially after the market's overreaction to the January inflation print, in our view.
EUR/HUF's upward movement post-yesterday's weaker inflation is expected to continue until the elections, providing opportunities for new long HUF positions. The start of rate cuts by the NBH in two weeks might be a test, but given the dovish market pricing, we don't anticipate much pressure on the forint. EUR/CZK could gain further upside to 24.300, reinforced by today's minutes.
Remember, this publication is for informational purposes only. ING does not provide investment, legal, or tax advice. Always consult a professional for personalized guidance.
