The dollar's safe haven: A controversial take on inflation
The tech sell-off has given the dollar a boost, but is it a true safe haven? Today, we explore the impact of inflation data on the USD and other currencies, and why some experts believe the dollar's strength may be short-lived.
USD: A delicate balance
The upcoming US CPI report is expected to have a limited market impact, especially compared to the recent payrolls data. The Federal Reserve has shown little urgency to make further cuts, with the jobs market taking center stage. However, today's inflation data could provide some insight into the Fed's future decisions.
We align with the consensus, predicting a 0.3% month-on-month and 2.5% year-on-year increase in both headline and core CPI. This aligns with the Fed's recent hawkish stance, which has pushed the dollar into a short-term undervaluation. But here's where it gets controversial: the undervaluation suggests an upside risk for the greenback in the coming days. Yet, the market's inclination to sell USD rallies leaves us questioning its long-term recovery.
A glimmer of hope for the dollar lies in its positive reaction to the tech sell-off, indicating a potential return of safe-haven status. But will this sentiment hold?
EUR: A neutral ECB stance
The eurozone's GDP print is expected to remain at 0.3% quarter-on-quarter, with little market impact anticipated. Turning to the ECB, Vice President Luis de Guindos will share his insights. Recent comments from other members have not deviated from the neutral stance, with no clear dissent. The lack of follow-up on the euro's strength post-meeting further supports a flat rate expectation.
The short-term fair value of EUR/USD has dropped to 1.165, widening the overvaluation gap. In line with our USD view, we hesitate to predict a complete gap closure, despite some downside risks for the pair.
NOK: Domestic rates lift the krone
The Norwegian krone experienced a strong week before yesterday's equity sell-off correction. The significant 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 has proven volatile. If inflation returns to 3.0% in the coming months, a rate cut this summer could become a base case scenario.
From an FX perspective, it's challenging 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 impact NOK's momentum, which may not occur until new CPI data is released next month.
Until then, NOK can find support in its attractive rate profile, especially if risk sentiment stabilizes. We favor NOK over SEK in the near term.
CEE: Testing the waters for rate cuts
Yesterday's lower-than-expected inflation in Hungary opened the door for potential rate cuts by the National Bank of Hungary in February. Meanwhile, the Central Bank of Turkey's inflation report suggests rate cuts remain on the table. Today, attention shifts to Poland and the Czech Republic.
In Poland, we expect January inflation to decline further from 2.4% to 1.9% YoY, in line with market expectations. However, Polish inflation has surprised on the downside in recent months, creating potential risks today. Recent comments from the National Bank of Poland council suggest a March rate cut to 3.75% is likely unless today's inflation data surprises on the upside.
In the Czech Republic, we'll analyze the breakdown of January inflation, which could reveal the strength of inflation in key areas. The central bank's minutes, released last week, indicated openness to discussing rate cuts if core inflation slows. These minutes could provide further details and support dovish market pricing.
EUR/HUF's upward movement post-inflation data has faded, and we expect this narrative to continue until the elections, where the market will take every opportunity to establish new long HUF positions. The beginning of rate cuts by the NBH in two weeks may be a test, but given the dovish market pricing, we don't anticipate significant pressure on the forint. EUR/CZK rebounded slightly, and today's minutes could reinforce this trend, pushing EUR/CZK higher to 24.300.
And this is the part most people miss: the impact of these decisions on the broader economy and global markets. Join the discussion below and share your thoughts! Are these currency movements a cause for concern or a natural market adjustment?
