FX Daily: Dollar finally catching up with its drivers

The US dollar is finally gaining momentum, driven by strong 10-year yields hitting 5.0%, which is a tolerable 50 basis points above our estimated neutral range. Markets were underwhelmed by the $6 billion buyback operation, implying any fresh intervention would face a higher hurdle. The dollar's rally is supported by oil prices, a soft risk environment, and the yen's loss of idiosyncratic momentum.

USD/JPY briefly touched 155.0, with near-term upside risks reaching 156-157. The most likely catalyst for a dollar correction today would be positive developments in the Gulf, as Brent prices have stabilized around $107 per barrel. Dollar gains may persist until the FOMC's verdict tomorrow evening, with the Empire Manufacturing and weekly ADP payroll figures being the only data releases.

For EUR, German ZEW expectations are expected to improve, but the euro could still be undervalued. The short-term EUR/USD target is around 1.150, but a hawkish Fed decision tomorrow could push the pair to our model's undervaluation threshold. GBP is holding up against the dollar's advance, and EUR/GBP is down by around 0.5% since Friday.

Our target remains 0.87 for EUR/GBP. In the CEE region, currencies are struggling following a global shock caused by rising energy prices and higher US Treasury yields. Front-end rates are expected to rise by 10-20 basis points, providing a buffer against further losses. EUR/CZK is expected to approach 24.300 during the CNB meeting, with potential upside if the central bank adopts a dovish tone.

EUR/PLN recorded the region's largest increase, with the zloty potentially stabilizing below 4.340. EUR/HUF remains sensitive to gas prices and may rise further, with the forint possibly testing levels above 368.