FX daily: Warsh is the Dollar lifeline, for now

Trump is widely expected to nominate Kevin Warsh as the new Fed Chair today. It’s good news for the dollar, which can price out some risks of a more dovish pick. However, a new catalyst may be needed in the coming days to break decisively below 1.190 in EUR/USD. There are plenty of data releases in the eurozone today, but the FX impact may be limited.

USD: More may be needed to fuel USD recovery

The Dollar has been waiting for a catalyst for a recovery, and the news that Kevin Warsh is likely to be announced as the new Federal Reserve Chair nominee today offers exactly that. Warsh has been amongst the most market-friendly candidates, as he is a former Fed governor with a history of hawkish views, especially on balance sheet reduction. Given how adamant Trump has been on reducing rates, it’s safe to assume Warsh has taken a more dovish stance during the interview process – but this pick may suggest a desire to calm speculation on Fed independence loss.

Warsh was tied as front-runner with Rick Reider – another market-friendly option – so the Fed-independence-concerns contribution to the latest dollar selloff was probably somewhat limited. Nevertheless, we have seen a decent recovery in USD in the range of 0.2-0.8% against G10 currencies.

It appears this could at least lower the risks of another major leg lower in the dollar for now. That said, there is a clear interest in buying the EUR/USD dip around 1.190 despite plenty of signals that the USD drop is too stretched relative to rates and the macro story. Another positive catalyst for the USD may well be needed to break the bearish tendency and take it on a steadier recovery. This could come from some comments by US officials about not being that comfortable with a rapid USD selloff after all, or strong data. Today’s PPI may not have much impact; ISM surveys next week, ahead of jobs data (ADP and official payrolls), offer the next best opportunity in that sense.

Data was not particularly supportive for USD yesterday either. Jobless claims were encouragingly low, but that's no news; the issue with the jobs market is low hiring, not high firing.

What was surely surprising was the widening in the US trade deficit from $29.2bn to $56.8bn between October and November. This likely reflects how the previous tightening in the trade deficit was driven by ships being held in port due to uncertainty about whether Liberation Day tariffs would stick. But it appears those ships were then released in November as imports jumped 5%. The impact of all this can be seen in the popular Atlanta Fed GDPNow 4Q estimate, which has dropped from 5.4% to 4.2% after this week's data.

EUR: Lots of data, limited impact potential

As discussed above, EUR/USD continues to attract buyers around the 1.188-1.1900 area, despite the more positive mood on USD. A break lower appears entirely USD-dependent anyway, and some eurozone data activity today should be secondary.

That includes German and Spanish CPI figures for January, as well as advanced GDP figures for the fourth quarter. Expectations for the latter are a modest slowdown from 0.3% to 0.2% quarter-on-quarter growth (also ING’s call), translating into 1.3% year-on-year – a figure markets are likely fully pricing in at this stage. We see German growth at a consensus 0.2% QoQ, while inflation may accelerate slightly from 1.8% to 1.9%.

Our macro team has published their ECB preview for next week. The euro will be a prominent theme, but previous reluctance by President Christine Lagarde to discuss FX suggests expectations for strong views on the currency should be kept in check. This may be more of a longer-term issue, with sustained EUR strength leading to potential downward revisions in inflation.

CAD: Decent growth, but USD remains main driver

Canadian growth figures for November are expected to come in at 0.7% YoY. This is an OK number, but a rather backwards-looking indicator and not hugely important for the Bank of Canada at this stage. We discuss the outcome of this week’s BoC meeting here. We see no real changes in the neutral stance, but the options remain open, and if we were to see any rate adjustment in the coming months, we think it’s more likely to be down than up.

The catalysts for a dovish repricing are more likely to come from the jobs market (the unemployment rate is being closely watched) and further deterioration in US-Canada relationships ahead of USMCA re-negotiations. The BoC takes its quarterly Business Outlook Survey into serious consideration, and that has continued pointing to trade uncertainty as the main driver for declining hiring intentions in 4Q25, even if other economic sentiment indicators started to improve.

If this USD recovery has legs, USD/CAD should at least head back to 1.36-1.37. But in the crosses, CAD should be doing better than most other G10 currencies due to its closest correlation with USD moves. Our view for USD/CAD is bullish in the short-term anyway, not only as we continue to favour the chances of further USD gains from here, but also as rocky USMCA negotiations ahead and risks to unemployment warrant some CAD idiosyncratic weakness.

CEE: Two-speed region

Friday will bring the biggest data load in the CEE region this week, with the focus on 4Q25 GDP numbers in Hungary, the Czech Republic and Poland. The whole of last year was essentially marked by the divergence of economies across the region. On one side, we have Poland and the Czech Republic, where numbers usually surprise upwards and indicate significant growth. On the other side, we see Hungary and Romania, where numbers are heading in the opposite direction, and we are basically on the verge of stagnation. We should see a similar pattern in the fourth quarter, and we expect this story to continue with 1.0% YoY growth in Hungary, 2.5% in the Czech Republic and 3.6% YoY in Poland (full year).

EUR/CZK continued to drift yesterday in line with our earlier expectations. We maintain our view of 24.350-400 as a landing zone ahead of the Czech National Bank meeting next week on Thursday, and potentially further upside depending on the tone of the central bank. Meanwhile, forint rates saw a rebound yesterday, which should support FX.

Yesterday's headlines on Ukraine may once again raise hopes for a peace deal and support CEE FX, where the forint usually benefits the most. In turn, it would not be surprising to see us test 380 EUR/HUF again, unless we see a significant downside surprise from the GDP data.

Read the original analysis: FX daily: Warsh is the Dollar lifeline, for now