The Fed Chair nomination is a hot topic, and today's announcement could be a game-changer for the dollar. Trump is expected to nominate Kevin Warsh, a former Fed governor with hawkish tendencies, as the new Fed Chair. This news is a relief for the dollar, which has been eagerly awaiting a catalyst for recovery.
But here's the catch: the market has already priced in some risks of a more dovish pick. So, while Warsh's nomination may provide a short-term boost, a more significant catalyst might be needed to push the EUR/USD below 1.190. Despite today's data releases in the eurozone, the FX impact may be limited.
The dollar's recovery prospects are tied to Warsh's stance. Trump's preference for rate reductions suggests Warsh might have softened his hawkish views during the interview process. This could indicate a desire to ease concerns about the Fed's independence.
Warsh and Rick Reider were both front-runners, so the recent dollar selloff may not be solely attributed to Fed independence concerns. Nonetheless, the USD has shown a decent recovery of 0.2-0.8% against G10 currencies.
The nomination might reduce the risk of a sharp dollar decline, but there's a catch. EUR/USD buyers remain active around 1.190, despite signals that the USD drop is overstretched. To break the bearish trend, another positive catalyst is needed, such as US officials expressing discomfort with a rapid USD selloff or strong data. Today's PPI may not be impactful, but next week's ISM surveys and jobs data could be crucial.
Yesterday's data didn't provide much support for the USD either. Jobless claims were low, but that's not surprising; the jobs market's challenge is low hiring, not high firing.
A surprising twist came from the US trade deficit, which widened from $29.2bn to $56.8bn between October and November. This likely resulted from ships being held in port due to tariff uncertainty, only to be released in November, causing a 5% import jump. The Atlanta Fed GDPNow 4Q estimate dropped to 4.2% after this week's data, reflecting the impact.
EUR/USD remains resilient despite the USD's positive mood. A break lower seems USD-dependent, and today's eurozone data activity is unlikely to be a primary driver.
German and Spanish CPI figures for January and advanced GDP figures for Q4 are due. Q4 growth is expected to slow modestly from 0.3% to 0.2% QoQ (ING's view), translating to 1.3% YoY, which markets have likely priced in. German growth is forecast at 0.2% QoQ, with inflation potentially rising from 1.8% to 1.9%.
The ECB preview for next week highlights the euro's prominence. However, President Christine Lagarde's past reluctance to discuss FX suggests managing expectations about her views on the currency. This could be a longer-term concern, as sustained EUR strength may lead to inflation revisions.
Canadian growth figures for November are expected at 0.7% YoY, a backward-looking indicator with limited importance for the Bank of Canada. The BoC's neutral stance is unchanged, but rate adjustments in the coming months are more likely to be downward than upward.
Dovish repricing catalysts could come from the jobs market and US-Canada relationship deterioration ahead of USMCA re-negotiations. The BoC's Business Outlook Survey highlights trade uncertainty as the main driver for declining hiring intentions in 4Q25, despite improvements in other economic sentiment indicators.
If the USD recovery gains momentum, USD/CAD could head back to 1.36-1.37. In the crosses, CAD should outperform most G10 currencies due to its close correlation with USD moves. Our short-term view is bullish for USD/CAD, considering expected USD gains and rocky USMCA negotiations.
The CEE region's divergence is evident, with Poland and the Czech Republic showing upward surprises and significant growth, while Hungary and Romania head in the opposite direction, nearing stagnation. This pattern is expected to continue, with Hungary at 1.0% YoY growth, the Czech Republic at 2.5%, and Poland at 3.6% YoY (full year).
EUR/CZK's drift aligns with our expectations, with a landing zone of 24.350-400 ahead of the Czech National Bank meeting next week. Forint rates rebounded yesterday, supporting FX.
Ukraine headlines may raise peace deal hopes, supporting CEE FX, particularly the forint. EUR/HUF could retest 380 unless GDP data surprises negatively.
Disclaimer: This content is for informational purposes only and is not investment advice. Readers should conduct their own research and consult professionals for personalized guidance.
