Forex alert: FX markets are bracing for a packed agenda

Despite the Federal Reserve's "hawkish hold," looming tariffs, and a shaky AI sector that weighed on US markets, stock futures are finding their footing. This comes as SoftBank Group Corp. is reportedly in discussions to invest up to $25 billion in OpenAI, signalling a significant endorsement for the US AI sector and potentially positioning it as the startup’s largest investor.

During US trading hours, investors navigated a whirlwind of “ bearish” developments, yet the overall market sentiment remained surprisingly resilient, best described as "shaken but not stirred." This non-ruffled demeanour was likely influenced by Federal Reserve Chair Powell, who, during his press conference, performed a master class in verbal gymnastics. He artfully conveyed the Fed's readiness to cut rates while emphasizing that there was no rush to enact these changes, keeping traders and investors on their toes. In other words, Fed doublespeak can be a wonderful soothsayer if folks want to believe it.

This sets the stage for an anticipatory market, poised for a pair of strategic 25 basis point cuts—one in the sultry heart of June and another as the year winds down in December. FX Traders are now perched on the edge of their seats, eagerly eyeing the next significant moves in U.S. economic indicators and the unfolding narrative around trade tariffs for their cues.

Trading has been subdued, and so far, it is likely influenced by the broader holiday atmosphere in Asia. However, unaffected by the Chinese New Year celebrations, Tokyo showed more fizz. Here, the yen saw some strength, possibly driven by interpretations of Bank of Japan Deputy Governor Ryozo Himino's remarks as somewhat hawkish. However, Himino also maintained a cautious stance, noting that rate hikes would occur "if the outlook is realized."

Later today, though, FX markets are bracing for a packed agenda. Foremost, expectations are set for the European Central Bank to implement another 25 basis point cut, reflecting a continued dovish stance. Adding to the market’s focus, a slew of fourth-quarter GDP data from both the US and Europe will provide further insights into the economic health of these major economies. This combination of pivotal ECB action and significant economic data releases could indeed stir significant volatility in the FX markets, setting the stage for potentially sharp movements depending on the outcomes and market interpretations.

Traders appear to have already baked the ECB's dovish expectations into the current pricing. With this in mind, any significant movements in the EUR/USD might hinge on subtler shifts in sentiment—akin to flipping a coin—or on interpretations of Lagarde's commentary during the press conference, which could introduce another layer of unpredictability. For instance, if Lagarde hints at prepping for a trade war, potentially pushing the rates outlook below the neutral threshold, it could fuel speculative moves lower on the widening implied swap basis. However, unless there's a dramatic dovish surprise, I remain skeptical that there’s enough momentum to drive EUR/USD down by 50-75 pips in a typical event-risk scenario. This leaves me questioning whether diving into a full short position offers a compelling risk-reward payoff at this juncture, but I have re-entered tiny shorts so far.