The recent week has seen a notable shift in market sentiment, particularly regarding US equities. The S&P500 faced a more than 2.5% loss on Monday, a downturn that was not confined to the US as European equities also suffered.
Amid this climate of risk aversion, the US dollar maintained its status as a safe haven currency, demonstrating classic textbook movements in foreign exchange: currencies like the JPY, USD, EUR, and CHF gained strength against higher-beta and commodity currencies. The challenge remains in identifying a bottom to the declining US sentiment and its impact on equities, especially as market participants express concerns about inflated valuations and a troubling macroeconomic climate.
The upcoming JOLTS job opening data might significantly influence the market’s response, with focus on job openings, layoffs, and the quits rate, which is an indicator of potential wage growth. Presently, sentiments surrounding the dollar are largely negative, yet there appears to be an upside risk in the weeks ahead.
However, with upcoming key data releases, caution prevails before committing to calls on the dollar’s bottom. Meanwhile, in the eurozone, despite challenges facing Germany’s prospective Chancellor Friedrich Merz concerning constitutional reforms, the euro demonstrated resilience.
Political dynamics, particularly between the necessary coalition parties, will be pivotal. Although initial headlines caused a drop in the euro, reports of ongoing discussions led to its recovery.
Expectations surrounding EUR/USD look for stability, with the current undervaluation possibly prompting a rise above 1.090, while a more reasonable target remains around 1.070. Turning to Sweden, the Riksbank’s testimony before parliament today could evoke significant market reaction.
Recent data indicates a hawkish shift in expectations, yet concerns linger regarding inflation data volatility, pointing to potential dovish risks for the SEK. In Central and Eastern Europe, inflation figures from Hungary and the Czech Republic are set to be released, drawing significant attention from market participants.
While Hungarian inflation is anticipated to drop slightly, despite potential upside risks, the outlook remains on rate stability from the National Bank of Hungary. For the Czech Republic, data reflecting stable core inflation foreshadows possible central bank commentary.
Despite recent declines in CEE currencies, a strong central bank stance and favorable geopolitical sentiment could foster positive market conditions.