Bank of America (BofA) analysts indicated that the prevailing bearish sentiment on Eastern Europe, Middle East, and Africa (EEMEA) foreign exchange (FX) is nearing its peak, particularly noting an exception for the Turkish lira (TRY).

According to BofA’s proprietary flow data, there is a record high in long positions on the U.S. dollar against emerging market (EM) currencies, which the analysts interpret as a contrarian signal that EM and EEMEA FX could soon start outperforming expectations, potentially beginning from February or March.

The report highlighted several currencies in the EEMEA region with a bullish outlook. The Polish zloty (PLN) is expected to strengthen due to a combination of a weaker dollar, a hawkish stance from Poland’s National Bank (NBP), and positive current account and foreign direct investment (FDI) inflows. The South African rand (ZAR) is also seen as bullish, with its undervaluation against the dollar poised to correct in a weaker USD environment.

In Turkey, the analysts are optimistic about the lira, citing tight monetary policy that supports adjustments in the current account, which should benefit the currency. Their forecast for the TRY is significantly more favorable than current forward rates.

The Israeli (ILS) has a neutral outlook from BofA, with predictions aligning with forward rates for the second quarter of 2025. However, they acknowledged potential upside risks for the shekel if ceasefire deals in the region are fully implemented.

For the Czech koruna (CZK), the report suggests that the currency is likely to perform better than forward rates indicate, as the Czech National Bank (CNB) is expected to be cautious with its easing cycle in the short term, and a weaker dollar should provide additional support.

Lastly, the Hungarian forint (HUF) is anticipated to gain strength from the second quarter onwards, bolstered by credible new central bank leadership and fiscal policy, alongside the influence of a weaker USD.

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Investing.com – The US dollar drifted lower Wednesday amid uncertainty over President Donald Trump’s plans for tariffs, while sterling fell on disappointing government borrowing data.

At 04:45 ET (09:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower to 107.755, after a slide of over 1% at the start of the week.

Dollar slips on tariffs uncertainty 

The dollar remained on the backfoot as traders tried to gauge the full extent of President Donald Trump’s plans for tariffs, and the potential pain the new administration plans to inflict on major trade partners.

Trump said late on Tuesday that his administration was discussing imposing a 10% tariff on goods imported from China on Feb. 1, the same day as he said Mexico and Canada would face levies of around 25%.

He also indicated that Europe would also suffer from the imposition of duties on European imports, but has refrained from enacting these tariffs despite signing a deluge of executive orders following his inauguration on Monday.

“Data will play a secondary role this week as all the attention will be on Trump’s first executive orders,” said analysts at ING, in a note. “Incidentally, the Federal Reserve is in the quiet period ahead of next Wednesday’s meeting. Expect a lot of ‘headline trading’ and short-term noise, with risks still skewed for a stronger dollar.”

Sterling falls after retail sales dip

In Europe, traded 0.1% lower to 1.2349, after data showed that Britain ran a bigger-than-expected budget deficit in December, lifted in part by rising debt interest costs.

was £17.8 billion pounds in December, more than £10 billion pounds higher than a year earlier, the Office for National Statistics said on Wednesday.

Rising UK government bond yields have added to the cost of servicing the country’s debt, and could result in the new Labour government having to cut government spending to meet its fiscal rules.

edged higher to 1.0429, but the single currency remains generally weak with the European Central Bank widely expected to cut interest rates more consistently this year than its main rivals, the Federal Reserve and the Bank of England.

The is seen cutting interest rates four times in the next six months, with a reduction next week largely expected to be a done deal.

“The direction is very clear,” ECB President Christine Lagarde told CNBC in Davos about interest rates. “The pace we shall see depends on data, but a gradual move is certainly something that comes to mind at the moment.”

BOJ meeting looms large

In Asia, dropped 0.1% to 155.69, ahead of the Bank of Japan’s two-day policy meeting later this week.

The is widely expected to raise interest rates on Friday, and could reiterate its commitment to further rate hikes if the economy maintains its recovery.

traded largely unchanged at 7.2715, with the Chinese currency still weak after Trump said he is considering imposing 10% tariffs on Chinese imports from Feb. 1.

Investing.com – Volatility in the US dollar following contradictory signals around the Trump administration’s plans for tariffs suggest that, at least in some ways, Trump’s second term will probably resemble the first, according to Capital Economics.

Tuesday’s sharp selloff in the US dollar followed reports that the many executive orders the new president would go on to sign didn’t include any immediate increase to US tariffs. A few hours later the greenback rebound after Trump suggested he will bring in 25% tariffs on China and Mexico in February.

“The first, and most obvious, point is that this is unlikely to be the last such episode over the second Trump presidency,” said analysts at Capital Economics, in a note dated Jan. 21, “with this pattern of leaks and counters familiar from the 2018-19 US-China trade war.”

“As was the case back then, uncertainty around Trump’s intentions will probably result in plenty of short-term volatility in currency markets.”

One key implication of these moves is that some expectations of higher tariffs are by now discounted, Capital Economics said. 

Positioning data suggest that market participants are heavily long dollars, on net, increasing the scope for sell offs when there is dollar-negative news, whether on account of tariffs or other reasons.    

It’s harder to make the case that expectations around tariffs have been the biggest driver in currency markets over recent months, or that higher US tariffs are anywhere close to fully discounted.

Instead, we think the main driver of the stronger dollar has been more prosaic: the rebound in US economic data since the Q3 recession scare, combined with bad news in Europe and China, has led to a shift in interest rate differentials in favor of the US.

That said, our working assumption remains that Trump will enact major tariffs on China later this year, “which is why we forecast the to be one of the worst-performing currencies this year.”