The currency market has mirrored the stabilization in tech stock sentiment, shifting focus today to central bank meetings. We believe the Federal Reserve hasn’t met the prerequisites for a dovish stance, allowing the US dollar to strengthen on a hold today. In other regions, anticipate clearly signaled 25 basis point cuts from both the Bank of Canada and the Riksbank. We maintain a bearish perspective on both the Canadian dollar (CAD) and Swedish krona (SEK).
USD: Minimal Risk of a Dovish Shift from the FOMC Today
The FOMC gathering today is expected to be subdued. In our analysis, we noted the Fed requires substantial economic weakness and reduced inflation for further rate cuts. Currently, while the job market and wages are gradually cooling, it’s insufficient for easing. Market forecasts suggest a rate cut isn’t likely until June.
We think a more probable trigger for a dovish reassessment is another steep selloff in tech stocks rather than a shift in Fed communication. Despite December’s lower-than-anticipated inflation, the robust job market should ensure Chair Powell maintains a cautious tone. The themes of tech volatility and the Fed’s autonomy in light of political pressures may arise at the press conference, but we doubt they’ll provoke significant concern about broader economic impacts, leading to Powell reaffirming the Fed’s independence.
If US tech stocks experience tranquility today and the Fed remains cautious, the dollar is expected to consolidate its gains amidst risks from universal tariffs, which support the current short-term overvaluation.
EUR: Targeting 1.040 Over 1.050
The euro remains influenced by US developments, notably regarding tech and tariffs. We do not expect a significant rebound in EUR/USD from either a cautious Fed or a dovish ECB tomorrow.
We estimate a 2% risk premium on EUR/USD, reflecting rising concerns over tariffs following Trump’s remarks. The US Treasury’s active tariff planning should help maintain that risk premium.
We foresee limited movement in EUR/USD through the week, with risks skewed towards falling below 1.040 rather than rising above 1.050.
CAD: Potential Dovish Lean from the BoC
Market consensus anticipates a 25 basis point cut from the Bank of Canada, which aligns with our forecast. Attention will focus on forward guidance from Governor Tiff Macklem, where we expect a dovish tone.
Markets predict 70 basis points of cuts by year-end, factoring in a pause in March. Amid the risk of US tariffs affecting Canada, we believe the BoC will adopt a cautious approach, indicating it is not nearing a terminal rate.
This suggests downside risks for CAD today, particularly if the BoC signals that US tariff risks influence its views. Such positioning would heighten CAD’s sensitivity to protectionism, leading us to foresee risks surpassing 1.45 in USD/CAD.
SEK: Riksbank to Cut, Nearing Terminal Rate
The Riksbank has lowered rates by 150 basis points since last May, with early indicators of success appearing as the housing market shows recovery.
However, hard data indicates a high unemployment rate. With core inflation at target and headline CPIF at 1.5%, the case for another 25 basis point cut to 2.25% today is compelling.
We believe the Riksbank may pause at 2.0% and suggest this meeting will provide hints that the easing phase is concluding. Nevertheless, given the potential impact of US tariffs, dovish flexibility remains a possibility, with risks tilted towards additional cuts compared to our projections.
The ultra-stable EUR/SEK is overdue for volatility, and while today’s Riksbank decision may not ignite this, the intersection of equity risk and US protectionism suggests upward potential for the pair. Importantly, we think the Riksbank may not oppose a weaker krona, as it could benefit Swedish exporters amid global trade slowdowns.
