FX daily: Don’t mess with the Dollar near term

Hot US inflation and the prospect of a more aggressive response from the Fed are the themes dominating FX markets currently. Another dose of firm US PPI today and some more hawkish Fed rhetoric are set to keep the dollar very supported into next week.

USD: Do not stand in the way of the Dollar

This week has seen a powerful, macro-driven rally in the dollar. Short-dated US yields are close to 40bp higher since Tuesday morning, when the Federal Reserve's Christopher Waller mused over the need for a 50bp hike in December. The market has since adopted the view that back-to-back December and January hikes look likely, while extending the full Fed adjustment from here to a full 85bp of tightening. That's beginning to look a lot more like a cycle than the kind of modest adjustment we recently presented in our house baseline view. Notably, a few Fed members are starting to describe conditions more as a demand than a supply shock.

It is hard to see what is going to change this hawkish Fed/dollar-positive mindset in the next few weeks. The Fed centrists might try to emphasise the need for a gradual adjustment in policy, but it is probably only a big US tech sell-off that can put a dent in short-dated US yields now.

In terms of the FX reaction, the low-yielding Swiss franc and the yen have some of the highest correlations with US rates and are under pressure. 0.8400 is a really important resistance area for USD/CHF and will probably help determine whether the dollar needs to take another big leg higher over the coming weeks. USD/JPY is already trading through the psychological level at 160, and we would not expect any intervention yet given the macro nature of the broadly stronger dollar. As we said on Wednesday, we expect to see dollar strength more expressed against activity currencies, where something like the low-yielding Swedish krona looks vulnerable.

For today, the October US PPI looks likely to keep the narrative of hot US inflation alive. Expect scrutiny into the components of PPI, such as healthcare, airfares and software, that feed into the Fed's preferred PCE inflation data – the next release of which is on 25 November. Were that core PCE to rise 0.3% month-on-month for the third month in a row, expectations of a 50bp December hike would grow.

DXY has broken to a new high for the year and looks like it can push on to the next resistance level at 104.60. That's about a 1.5% advance from current levels and would be consistent with EUR/USD trading around 1.0880.

EUR: ECB struggles to outhawk the Fed

European Central Bank rhetoric firmly points to the need for a rate hike in December. The problem for EUR/USD is that the market sees the potential for a prolonged tightening cycle as more credible in the US than in the eurozone. You don't hear many ECB speakers talking of a demand shock in Europe. Short-dated EUR/USD swap differentials have moved out to the widest levels of the year and are clearly weighing on the pair.

Given the run of expected US inflation data over the coming weeks, we struggle to see what can take the pressure off EUR/USD. A break below 1.10 is not a given, but that level is certainly at risk into year-end. EUR/USD bulls will have to be hoping for either an AI crash, the ECB sounding far more hawkish or perhaps some major geopolitical breakthrough in Iran or Ukraine.

In focus today will be the second release of third-quarter eurozone GDP data. This printed a respectable 0.4% quarter-on-quarter previously. And there are also several ECB speakers – all likely to point to a December rate hike.

CEE: The pressure on FX is far from over

Friday will bring more data to the CEE region than the relatively quiet days we have seen this week. This morning, Q3 GDP figures for Romania and Poland will be released. While the former is expected to show some acceleration, the latter is likely to reflect a slowdown. Poland will also release its final inflation reading for October, expected at 3.5%, and on Monday, we'll receive the core inflation figure, which we estimate has slowed to 2.8%.

In Turkey, inflation expectations for November will be published. Yesterday, the Central Bank of Turkey revised its inflation forecast for next year from 15% to 21%, bringing it closer to the current market expectation of 23% but also opening the door to a December rate cut. The Czech National Bank will release the minutes from last week’s meeting, during which it raised interest rates by 25bp to 4.00%. However, the 4-3 vote split sent a dovish signal, and today we will learn how individual members voted and see the details of the discussion.

The CEE market remains under pressure. Yesterday’s surge in energy prices and new lows in the EUR/USD pair are pushing regional FX to new lows. In line with our bearish bias, we believe this is far from over. EUR/HUF could test 366, but we believe the 368-370 range remains an area for new sellers to enter, effectively capping the pair. Meanwhile, the National Bank of Hungary is expected to take a firm stance next week and avoid rushing into rate cuts despite low inflation, which could support the forint, given that one to two rate cuts are currently priced in.

EUR/CZK reached new local highs yesterday, nearing 24.400. We believe this should mark the peak, unless the CNB minutes reveal a more dovish tone than what we observed last week.

BRL: Lula trying to take some fiscal action

The Brazilian real has slumped since incumbent President Luiz Inácio Lula da Silva beat Flavio Bolsonaro in the run-off vote last month. At the heart of the concern is the fiscal side, where Lula's pre-election proposals have only added to concern about Brazil's fiscal position. Over the last few days, however, Lula's government has started to propose some fiscal consolidation for the 2027 budget, and we presume more is coming.

While Brazil's fiscal story is vulnerable, its monetary story is supportive for the real. High real interest rates and an independent central bank make the Brazilian real an expensive sell. We look for a recovery in 2027. Please see the Latam section in our 2027 FX Outlook for more.

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