Is US Inflation About to Shake Up the Markets? Not Likely, But Here's the Twist...
FX Insights: Navigating the Currency Waves
The recent tech stock selloff seems to be lending a helping hand to the US dollar, hinting at a resurgence of its safe-haven appeal. While the dollar currently trades at a discount against most major G10 currencies, lingering medium-term pessimism might still encourage investors to sell during rallies. Our take? Today’s Consumer Price Index (CPI) data is unlikely to surprise, aligning with market expectations. But here's where it gets interesting: despite the dollar’s short-term undervaluation, we’re seeing a tilt towards potential upside risks in the coming days. However, this week’s price movements suggest a prevailing trend of selling the dollar during rallies, leaving us skeptical about a substantial recovery anytime soon.
USD: A Slight Boost, But Will It Last?
Today’s US CPI report is expected to have a milder impact compared to Wednesday’s payroll data. The Federal Reserve has been signaling a lack of urgency to cut rates further, with the jobs market remaining the primary driver of any significant shifts. Interestingly, we anticipate January’s inflation figures to align with the consensus—a 0.3% monthly and 2.5% yearly increase for both headline and core CPI. This should reinforce the recent hawkish adjustments in Fed expectations, further highlighting the dollar’s short-term undervaluation. While this undervaluation suggests potential upside risks for the greenback, the market’s inclination to sell during rallies casts doubt on a robust recovery.
A silver lining for the dollar is its positive response to the latest US tech selloff, indicating a partial restoration of its safe-haven status. But this is the part most people miss: even with this slight boost, the dollar’s path to recovery remains uncertain.
EUR: ECB’s Unified Front Keeps Rate Expectations Steady
The eurozone’s economic calendar features the second release of fourth-quarter GDP, expected to confirm a 0.3% quarterly growth. However, this is unlikely to move the markets. On the European Central Bank (ECB) front, Vice President Luis de Guindos is set to speak, though recent comments from other members have flown under the radar, with no significant dissent from the prevailing neutral stance. Notably, there’s been little discussion about the euro’s strength post-meeting, leaving rate expectations largely unchanged for the foreseeable future.
The short-term fair value of the EUR/USD pair has dropped to 1.165 following the latest hawkish adjustments in the USD curve, widening the overvaluation gap. In line with our USD outlook, we’re hesitant to see this gap close entirely, though some downside risks for the pair persist. And this is the part most people miss: the euro’s trajectory remains tightly linked to the ECB’s unwavering stance.
NOK: Domestic Rates Provide a Lift, But for How Long?
The Norwegian krone enjoyed a strong week until yesterday’s equity selloff triggered a partial correction. The sharp rise in Norwegian CPI (January data, released Tuesday) has led markets to rule out any rate cuts by Norges Bank this year. We believe this is premature. Inflation has proven volatile, and if the next few months see a return to 3.0%, a summer rate cut could become the baseline expectation again.
From an FX perspective, betting against the krone’s strength is tricky at this point. Unlike the undervalued EUR/SEK, our short-term valuation model indicates that EUR/NOK is fairly priced due to the hawkish repricing of the NOK curve. This means a dovish event is necessary to significantly dent the krone’s momentum, which may not occur until new CPI data is released next month.
In the meantime, if risk sentiment stabilizes, the krone could find further support in its attractive rate profile. We continue to favor the NOK over the SEK in the near term. But here’s where it gets controversial: is the market underestimating the potential for a rate cut in Norway? Let us know your thoughts in the comments.
CEE: Gauging the Pulse for Further Rate Cuts
Yesterday’s lower-than-expected inflation in Hungary opened the door for potential rate cuts by the National Bank of Hungary at its February meeting. Similarly, the Central Bank of Turkey’s inflation report hinted that rate cuts remain on the table. Today, the focus shifts to Poland and the Czech Republic.
In Poland, January inflation data is expected to show a further decline from 2.4% to 1.9% year-on-year, in line with market forecasts. However, Polish inflation has consistently surprised on the downside in recent months, creating inherent risks for today’s release. Recent comments from the National Bank of Poland suggest a March rate cut to 3.75% is likely, barring any significant upward surprises in inflation.
In the Czech Republic, the breakdown of January inflation could shed light on price pressures in sensitive sectors. More attention, however, may be directed toward the Czech National Bank’s meeting minutes. While the central bank held rates steady at 3.50% last week, it signaled openness to discussing rate cuts if core inflation slows. The minutes could provide further insights, potentially reinforcing dovish market pricing after what we view as an overreaction to January’s inflation data.
EUR/HUF’s upward momentum quickly faded following yesterday’s weak inflation data, and we expect this trend to persist until the elections, with the market seizing every opportunity to take new long HUF positions. The start of rate cuts by the NBH in two weeks may serve as a test, but given the dovish market sentiment, we don’t foresee significant pressure on the forint. EUR/CZK rebounded slightly after the market repriced rate cuts, and today’s minutes could strengthen this narrative, pushing EUR/CZK toward 24.300.
Final Thoughts: What’s Next for the Markets?
As we navigate these currency fluctuations, one question lingers: Will the dollar’s safe-haven status fully recover, or will market trends continue to favor selling during rallies? And what does this mean for the euro and emerging market currencies like the NOK and HUF? We’d love to hear your take—share your thoughts in the comments below!
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