In spite of a better-than-expected US June jobs report and a 10/12bp jump in short-dated US interest rates, the US dollar is barely changed from its soft levels seen this time yesterday. Seemingly, the threat of more tariff-induced FX volatility next week is keeping the outlook fragile. Elsewhere, we think the Polish zloty stays soft on a dovish central bank
USD: Tariff Threat Keeps the Dollar Heavy
US Dollar gains on the back of a stronger US jobs report proved fleeting. While one can argue that the data perhaps was not as strong as the headlines suggested, the US bond market saw it as a good number, and US yields are 10-12bp higher across the curve. Normally, this would be associated with a stronger dollar, but today the dollar is barely off the recent lows.
Here, it seems the market is bracing for some more tariff-related volatility. That can be seen in the term structure of the traded FX options market, where EUR/USD volatility remains elevated for the next three weeks before starting to edge lower for the rest of the year.
In focus is Washington’s next step in its tariff war. In theory, if a country has not signed a trade deal with the US by 9 July, elevated ’Liberation Day’ tariffs will revert - e.g., rising from the discounted 10% levels back to 20-30%. President Trump has suggested letters are being sent out to trading partners over the next few days telling them of their new tariff rate. Needless to say, this could be a noisy period for FX markets as the White House again makes heavy threats in order to get trade deals over the line.
As a reminder, the top G10 FX performers during the worst of April’s volatility were the Swiss franc, the euro, and the Japanese yen - in that order. The dollar was broadly offered. And yesterday’s FX price action suggests investors and corporates were more than happy to sell dollars into rallies.
We can’t expect too much from FX markets today, given the 4 July US public holiday. Yet the dollar looks as though it will stay soft into next week.
DXY to trade well within this week’s 96.35-97.45 range today.
EUR: Strong Euro Is Getting the ECB’s Attention
We are starting to hear a little more from the European Central Bank about the strength of the euro. The general view seems to be that a quick EUR/USD move through 1.20 would be a concern. For reference, the ECB’s Survey of Professional Forecasters back in 2023 asked the question about what a 10% appreciation in EUR/USD would have on macro forecasts.
The mean response is that it would shave 0.5% off headline CPI in the first year and knock about 0.3% off real GDP. The ECB’s response to EUR/USD strength will therefore be carefully crafted remarks centred on the ECB not having an exchange rate target but being fearful that further euro strength could see inflation undershoot its target and prompt deeper rate cuts.
In our experience, central bank concerns over macro-driven moves in exchange rates are slow to turn trends around. So don’t expect the ECB to put a lid on EUR/USD at 1.20 should it get there.
Expect EUR/USD to trade well within yesterday’s 1.1810 to 1.1720 range today. But the dollar will remain vulnerable over the weekend to news of higher tariff rates coming in again.
Elsewhere, the Swiss franc remains strong. The Swiss National Bank continues to have its hands tied - seemingly reluctant to take the policy rate negative again and also to undertake large-scale FX intervention in the middle of trade discussions with the US. More trade volatility could send USD/CHF and EUR/CHF lower next week.
With the strong Swiss franc adding to Switzerland’s disinflation problem, it does look like the SNB will have to try and intervene in the 0.9200/9250 area in EUR/CHF after all.
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