A burgeoning sell-off in US tech stocks and ongoing volatility in the metals markets are providing many cross-currents for FX. Yet interest rate volatility remains low, providing some insulation to those heavily invested in FX carry trades. Rate meetings in the eurozone, UK and Czechia are the focus for today’s session, as is some second-tier US jobs data
USD: Tech Stocks Attracting Attention
One of the strongest early-year trends in FX markets – the backing of procyclical G10 and emerging market currencies – is undergoing a correction this week. We’ve seen some significant reversals in very popular pairs like and . This has had nothing to do with interest rate markets, which are being very well-behaved, but more to do with some stretched positioning and perhaps now a more difficult US equity environment. The focus this week is on the underperformance of US tech stocks after an AI tool launched by Anthropic challenged the more conventional software companies. It is very hard to say that this US tech correction has legs, but a fully invested buy-side does look vulnerable to any bad news.
At the same time, we are seeing continued volatility in the metals market. Big sell-offs in silver are seen as mildly positive for the dollar, with the causation seemingly running from silver to FX these days. Please see our commodities team’s take on events here. The idea of a reset and not a reversal here seems to be backed up by large flows into Silver ETFs on Monday.
What does this all mean for the ? A more difficult equity environment would typically see a flight from risk and a flight from procyclical currencies into the dollar. That is what is probably lending the dollar a little support this week. But dollar gains do not need to go too far from here. A US-led equity correction would hit US activity hard, trigger more aggressive and ultimately weaken the dollar. At the same time, the US diversification theme (or at least the increased dollar hedging theme) looks likely to hang over the dollar for most of the year.
For today, the macro focus will be on second-tier US jobs data. The weekly have been low recently, near 210k, but more interest may be had in the December data released at 1600 CET. The focus will be on the layoffs figure to gauge whether the no-hire, no-fire economy is deteriorating. The Fed’s ahead of the January FOMC meeting showed no deterioration in the jobs market, and thus a notable spike in layoffs looks unlikely today.
can probably stay gently bid, especially as USD/JPY explores the upside ahead of Sunday’s election in Japan. DXY could edge up to the 98.00 area and certainly has unwound a lot of the technical bearishness seen at the start of last week. But the case for DXY to go a lot higher has yet to be made.
EUR: Lagarde Will Be Asked About the Euro
The above cross-currents have weighed on this week. But arguably it has remained quite resilient – especially given the recent spike in energy prices. Today’s challenge to EUR/USD will come from today’s ECB press conference at 1445CET. Here, President Lagarde will likely be quizzed over the ECB’s reaction function to euro strength. It is not just EUR/USD that has been strong. The ECB’s nominal trade-weighted euro is at multi-decade highs and, more importantly, appreciating at a 7-8% YoY rate.
My colleague Carsten Brzeski discusses how the ECB might react to a strong euro here. Comments from Lagarde, such as that the ECB is ’monitoring exchange rates closely’ or any mention of downside risks to inflation having increased, would hit, but not bury EUR/USD. Sub 1.1770 today could open up the 1.1700/1720 area, but we doubt EUR/USD needs to go much lower than that near term.
GBP: PM Leadership Challenge Gathers Pace
We may be reading a little too much into price action, but it did seem to sell off yesterday afternoon after PM Keir Starmer faced a confrontation from his own Labour MPs in the House of Commons. Some would argue that Angela Rayner effectively kicked off her leadership bid by calling for greater scrutiny of the vetting process used for last year’s appointment of Peter Mandelson as UK ambassador to the US.
The prospect of a change in both prime minister and chancellor remains one of the key threats to sterling this year, where a replacement of the PM by Rayner would mark a clear shift to the left and add further doubts to the UK fiscal position. A by-election later this month and local elections in May mean that it will be a noisy few months for UK politics.
This week’s dip could be the low point this quarter. For today, look out for the Bank of England statement at 1300CET. It looks a little early for the BoE to turn more dovish, though lower inflation into April means that we are still calling for two cuts in the first half and a weaker pound.
Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
