The started the holiday week with some support, but we might not get a clear directional USD move over the coming days, allowing more focus on domestic stories elsewhere in the G10. Germany’s should improve this morning, while the RBNZ should keep rates on hold overnight, but may send some hawkish hints
USD: Oil Giving Some Support
A quiet start to the week due to a US holiday has seen the dollar find some support. Aside from a stretched USD short-term undervaluation that by itself justifies some USD gains on calm days, the increase in oil prices was probably the main driver for G10 FX yesterday.
The trigger was a report that Iran conducted drills around the Strait of Hormuz, probably in an attempt to show leverage ahead of talks with the US. The probability of a US strike on Iran by the end of March remains close to 40% according to betting markets. Further perceived escalations can lead to more support coming the dollar’s way via the oil channel.
As highlighted in yesterday’s FX Daily, potential volatility in the stock market could be more relevant than data this week. But today’s weekly payrolls should attract some interest after the 10-24 January came in on the soft side. The is also out today, expected to decline to the low sixes.
We may not get a clear USD directional story this week, so focus may shift to local stories in the G10. The Reserve Bank of New Zealand could send some hawkish signals (preview here) tonight and lift , while the and face some downside risks from data.
EUR: Strong ZEW Today
We discuss in more detail the expansion of the European Central Bank’s EUREP repo lines in this note. While framed as a financial stability tool, we believe that it represents another step toward a truly “global euro”, expanding its use beyond Europe and strengthening its role in trade, reserves, and international debt markets. It may also hint at a more relaxed ECB stance towards euro strength.
On the data side, ZEW surveys are out this morning and are expected to show further improvement. The Expectations index should move above 60.0 for the first time since mid-2021, and might offer some support to the euro.
That said, we remain slightly more in favour of downside for the remainder of the week, given room for USD to recover based on short-term fundamentals. A test of 1.1800 soon remains our baseline.
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