Central banks shake up forex

Growing demand for safe-haven assets and the closing of hedges by non-residents have been catalysts for the strengthening of the US dollar. The escalation of geopolitical risks in the Middle East, the associated rise in oil prices and the potential slowdown in the global economy are forcing investors to seek safe havens. A large-scale sell-off of gold, reminiscent of a burst bubble, is casting doubt on the precious metal's ability to fulfil these functions. The only option left is to buy greenbacks.

The fall in EURUSD has been driven by the worst rout in the US stock market since April’s America Liberation Day. Non-residents own more than a fifth of US securities. Despite the undermining of confidence in the dollar due to Donald Trump's policies, it is not so easy to abandon the US stock market. Corporate earnings there have grown faster over the past decade than in any other region of the world, and US technology companies have few worthy competitors abroad.

Foreign investors are left to hedge the risks of investing in US securities by selling dollars. The fall in the S&P 500 leads to the exit from longs in stocks and purchases of the greenback.

Investors are eagerly awaiting the ECB meeting. The deposit rate is likely to remain at 2%, unchanged since June. Earlier, the European Central Bank stated that it was in a comfortable position amid faster economic growth. However, the strengthening of the euro and inflation dipping below the target brings back to the table the scenario of a potential rate cut.

In January, consumer prices in the eurozone slowed to 1.7%, with core inflation falling to 2.2%. These are the lowest levels since September 2024 and October 2021, respectively. The disinflation process may activate the ‘doves’ on the Governing Council. If Christine Lagarde hints at a resumption of the monetary expansion cycle, EURUSD sales will accelerate.

Unlike the ECB, the Bank of England is not concerned about the strengthening of the pound. Britain has the highest inflation rate among G7 countries and is facing the problem of slowing economic growth amid tax increases. The futures market expects the repo rate to remain at 3.75% in February and gives a 70% chance of a cut in April. Any hints from the BoE in this direction will accelerate the GBPUSD selloff.