- Today, 07:50
- FX
We expect the Riksbank to deliver a hawkish hold, hinting at an imminent rate hike, which we expect in November. In Norway, we see a rate hike in a close decision. NOK faces greater upside than SEK as markets and consensus are more split regarding Norges Bank. Meanwhile, the dollar rally has accelerated, and the move is starting to look stretched
USD: Rally starting to look stretched
The dollar jumped yesterday, with DXY breaking above 101.0. Very strong US PMIs, higher oil prices and soft risk sentiment have all contributed to the bullish narrative, although the move is starting to look stretched relative to fundamentals. We are cautious in calling for a bottom in the dollar just yet because any upside surprise in upcoming US data releases can easily prompt markets to fully price in an October Fed hike and prop up short-term rates even more. But if this risk doesn’t materialise, we expect a correction in DXY in the coming weeks, with a return to the 100-100.5 area.
USD/JPY remains another source of potential downside risk for the dollar. The rapid rally in the pair may draw Japanese authorities to intervene – remember last week’s reported rate check – and that could easily spill over into a weaker USD across the board. Without any intervention, a return to above 160.0 levels looks inevitable after the dovish surprise by the Bank of Japan last week.
Today, focus will be on the summit between President Trump and Chinese leader Xi Jinping. There is a history of Trump striking a more conciliatory tone in face-to-face events, and Scott Bessent has already announced an extension of the trade truce by two months. We’re not sure the dollar will respond much to positive US-China headlines at this stage, with any positive effect probably more visible in AUD and NZD. Those could emerge more prominently as proxies for CNY after the People's Bank of China set a weaker fixing for the yuan for the second consecutive day.
Fedspeak also remains firmly on investors’ radar, with Williams, Barkin, Hammack and Paulson all due to deliver remarks today. The data calendar is quiet.
EUR: Downside risks start to shrink
The break below 1.140 in EUR/USD has sent the pair into stretched undervaluation territory according to our short-term fair value model. That’s because short-term rate differentials actually moved in favour of the euro, offsetting the negative impact on fair value from lower equities and oil.
The move was entirely dollar-driven. PMIs also surprised on the upside in the eurozone, with services rising sharply, which marginally helped the euro in some crosses.
The lack of clear technical support in EUR/USD until the June lows, where intraday spot hit 1.1325-30, means catching the falling knife remains risky for now. However, we don’t see the conditions for a break into new lows just yet unless the short-term rate differential widens in favour of USD. A 1.1430-1.1450 level would be more in line with the current environment. So we’d expect a convergence to that area ultimately.
Scandies: A hawkish hold and a hike
We expect SEK and NOK to outperform today thanks to a hawkish hold by the Riksbank and a 25bp rate hike by Norges Bank. NOK has more upside potential.
Markets and consensus are fully aligned in expecting no rate change by the Riksbank this morning. As discussed in our preview, inflation has remained muted, even when adjusting for tax distortions. That argues against an urgent move just yet. However, the 2Q growth surprise reduces the cost of delivering some insurance tightening, in our view, starting from the November meeting. Persistently high energy prices and SEK’s weakening add to the pressure building from other central banks – especially the ECB and the Fed – that have started hiking already. We expect hints of imminent tightening and a revision higher in rate projections today.
SEK should get some help from it, but markets are already fully pricing in a November hike and another by February, meaning a decisive turn lower in EUR/SEK will still require lower oil prices and more stable risk sentiment. Upside risks into 11.35-11.40 remain in the near term, but our baseline is for a return to 11.0 by 1Q27.
In Norway (meeting preview here), inflation rebounded in August, but the underlying measure remained 0.3pp below Norges Bank’s June projections. That makes it a close call today, and consensus is equally split between hike and hold. But a good growth outlook and pressure from other central banks’ decisions can tilt the balance for a hike in our view. Market pricing is 16bp, allowing some room for NOK to rally from the hawkish surprise. Incidentally, markets are not pricing much more than one hike also into next year, meaning even a hawkish hold could not be dramatically negative for NOK. We think this is the last hike of the cycle anyway. We maintain a near-term EUR/NOK target of 10.70, but are looking at increasing downside risks into year-end.
CEE: Global headwinds keep regional FX under pressure
A new day brings a new direction for the markets. Market sentiment shifted again yesterday, and we saw a strong hawkish repricing across the region; rates across the region and along the curve returned to previous highs. Despite higher regional rates, we observe that rate differentials are actually narrowing or remaining stable. This is currently insufficient to stabilise FX, while the US dollar continues to rally. Coupled with a rebound in global energy prices, this creates an overall negative environment for CEE currencies.
We therefore maintain a bearish bias and anticipate further regional weakness, with the PLN likely to underperform in this environment given the central bank's dovish stance relative to its peers. Today’s calendar is light, featuring only consumer confidence data from the Czech Republic – a figure unlikely to impact a market dominated by global narratives.
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