The US Dollar's Tailwind Troubles
FX Market Insights:
Despite a strong showing in US job numbers yesterday, the dollar is struggling to gain momentum. This surprising reaction reveals a deeper strategic bearishness on the greenback, indicating that investors are seeking more convincing data to reverse this trend.
USD: A Mixed Response to Payroll Data
The payroll data brought both good and bad news for the dollar. On the positive side, job numbers exceeded expectations, with unemployment dropping to 4.3%, payrolls doubling the consensus at 130k, and wage growth surpassing forecasts. These figures seem to outweigh the 862k payrolls revisions for 2025, especially given the consensus was 825k.
However, the dollar's rally was short-lived, and the initial gains were quickly halved. This wasn't due to doubts about the jobs figures but rather a reflection of the market's long-term view. Short-term dollar rates rose, suggesting that investors are still inclined to sell USD rallies based on longer-term considerations.
EUR: Anticipating Ukraine Talks
The EUR/USD support is primarily driven by strategic USD selling, with minimal influence from the eurozone. With an empty calendar and no significant announcements expected from ECB speakers, the focus shifts to next week's Ukraine discussions. Ukrainian President Zelenskiy's announcement that the talks will center on a territorial deal has piqued interest. While ceasefire negotiations have progressed slowly, next week's developments could be significant. Monitoring European gas prices for signs of optimism is crucial, as they've been under pressure since February, influenced by milder weather expectations.
GBP: Bearish Outlook Post-GDP Data
The UK economy's lackluster performance in 2025, particularly in construction and business investment, is a cause for concern. Although the Bank of England already had data for October and November, the recent hiring weakness and sharp wage growth slowdown are significant. We anticipate a March cut from the BoE, followed by another in June, and maintain a bullish stance on EUR/GBP, with 0.88 as a realistic short-term target.
HUF: January Inflation Triggers NBH Rate Cut
January's inflation figures, released this morning, confirmed a sharp drop from 3.3% to 2.1% YoY, below market and central bank expectations. This is a critical factor for the National Bank of Hungary's February meeting, as December's slight inflation surprise had already drawn attention. The breakdown reveals a broad decline in year-on-year inflation, with core inflation dropping to 2.7% and service inflation slowing to 5.0% YoY. This data justifies restarting the NBH cutting cycle from September 2024, with expected cuts of 25bp in February and March and a total of 75bp this year, reaching 5.75% by year-end. However, the key factor will be the market reaction to the general election in April.
Before today's inflation figure, the market anticipated a 65% chance of a February rate cut. This figure is likely to encourage more dovish bets, and a fully priced-in rate cut is imminent. Interestingly, the priced terminal rate of 5.50% is significantly higher than our forecast of 4.50%, suggesting potential for a substantial repricing. This could exert pressure on the forint, which has recently rallied, and may push EUR/HUF back above 380, possibly into the 381-383 range.
Controversial Interpretation: Some analysts argue that the dollar's struggle is a temporary blip, and the market is merely digesting the strong jobs data. But here's where it gets controversial: could this be a sign of a deeper shift in market sentiment, with investors seeking more than just good data to regain confidence in the greenback?
Author's Comment: The dollar's resilience in the face of positive data is intriguing. While it's easy to attribute this to market caution, it may also reflect a broader shift in investor priorities. As we move forward, it will be fascinating to see if the dollar can regain its footing or if this is the start of a more extended bearish trend. What's your take on the dollar's recent performance? Do you think it's a temporary setback or a sign of deeper market concerns?
