USD: Commodity currencies can extend recovery

Friday’s good momentum in equities only extended to the first part of yesterday’s session, as another bad day for global bonds prompted early gains to be erased. This morning, equity futures mostly point at a flat or slightly negative open, as markets continue to look for a balance between the magnitude of recession risk and the consequent impact for rates and global monetary conditions.   

Interestingly, the FX market saw a reversal of the “sell-Europe” dynamic observed last week after the release of June’s PMIs, as European currencies, led by the Scandies, have started the week with a strong footing. A couple of days without major losses in global equities also let NOK and CAD - the two currencies with one of the most attractive set of fundamentals given their commodity exposure - regain some ground. These dynamics endorses our view that most near-term FX moves remain strictly tied to global equities swings, but that periods of relative stabilisation in sentiment should allow CAD and NOK emerge as key outperformers as they re-connect with their commodity and rates drivers.

Today’s calendar in the US includes the release of the Conference Board Consumer Confidence index, which has steadily fallen in the past year and offers a gauge of how rising inflation expectations is starting to negatively impact household spending. Consensus is looking at another sharp drop in the index today. On the central banks’ side, markets are awaiting tomorrow’s speech by Fed Chair Jerome Powell’s at the Sintra forum. Today, Mary Daly is the only scheduled Fed speaker.

Let’s see if some grim consumer confidence data today trigger another “bad news is good news” reaction for equities, which might see some further signs of stabilisation if a deteriorating economic outlook suggests less need for aggressive monetary policy action. This could generate some moderate dollar weakness, especially against the pro-cyclical/commodity currencies, although any USD correction will likely prove temporary for now given the still broadly supportive underlying narrative of Fed tightening.

EUR: A high bar for hawkish surprises in Sintra

ECB President Christine Lagarde is set to deliver the introductory speech at the ECB’s Sintra forum this morning, and she will be followed by Chief Economist Philip Lane before attending a press conference in the early afternoon. She will also deliver speeches tomorrow.

Expect most of the discussion in Sintra to hover around the risks to the economic outlook and how those can impact monetary policy decisions. Indeed, Lagarde is expected to provide some colour on how seriously the ECB is considering a 50bp rate hike in September in light of recent activity survey pointing at a rapidly deteriorating picture for the eurozone. Also, more details of the anti-fragmentation tools discussed earlier this month will likely be addressed.

A look at rate expectations embedded in the swaps market – 150bp of tightening fully in the price by year-end – suggests that the bar for a hawkish surprise is likely set quite high, and we doubt that Sintra will be the catalyst for a significant break higher in EUR/USD. Still, a softer dollar environment could help a move and stabilisation in the 1.0600-1.0650 range this week, even if we see a return to 1.0500 in the remainder of 3Q as more likely.

GBP: Still no impact from Brexit headlines

The pound continues to be rather unreactive to Brexit-related news. The UK Government proposed bill to unilaterally scrap part of the Norther Ireland protocol yesterday, which will now need to be voted by the House. There are surely many indications that the pound is largely pricing in this scenario, and markets remain mostly focused on other drivers of UK economic underperformance as well as assuming Brexit is not a major input in the BoE’s policy decision-making process at the moment.

The re-pricing lower in BoE’s rate expectations were part of a global dynamics, which has helped the pound remain well clear of 1.2000 for now. Tomorrow’s speech by BoE’s Governor Andrew Bailey in Sintra will be the main event of the week. A broadly hawkish message could further help the pound stabilise and possibly drag EUR/GBP back below 0.8600.

HUF: Bar for reversal of negative sentiment too high

The main event this week in the CEE region is today's meeting of the Hungarian Central Bank. ING's Peter Virovacz expects at least 50bps hike in the base rate to 6.00% and a 30bps hike in the deposit rate to 6.75%. However, the key question is how much the MPCs will assess the current level of the forint and the pressure for further depreciation above the 400 EUR/HUF level. Although the central bank has previously shown a quick reaction to current market developments, the latest meeting, on the other hand, showed a more machine-like approach. Thus, it is the weaker forint that could push the central bank to take a bolder step.

On the other hand, the market bar is too high, in our view, that the NBH could hardly surprise the market enough to turn around the negative market sentiment. Overall, we thus do not expect much from the forint today. At best, we expect a return to 395. Otherwise, one would say that the limit for further forint weakness is unlimited, but we believe that a lot of negative news is already priced in and short positioning should not allow another strong sell-off.

In the long run, not much has changed in our view. The forint continues to be our least favorite currency in the CEE region, but we continue to watch headlines signaling a turnaround in Rule of Law and EU funds disputes that should unlock the hidden potential of the forint in the second half of the year (perhaps in September).