A pivotal week for the USD?
At a Glance
The desk believes that the upcoming week, marked by critical central bank meetings—including the Fed under new Chair Kevin Warsh—could be a pivotal moment for the USD. Per the full note from MUFG, positive economic data surprises in both activity and inflation are mounting pressure on the Fed to adopt a more hawkish stance, potentially leading to renewed strength in the dollar. While the market has begun pricing in more rate hikes, the outcome of the Fed meeting will be essential in determining the sustainability of this upward trend. Investors should remain alert to how the evolving landscape, including sentiments surrounding a potential US-Iran deal, might further influence the currency outlook.
Key Takeaways
- 01Upcoming Fed meeting could be pivotal for USD direction amid changing leadership.
- 02Positive economic data is bolstering expectations for US rate hikes.
- 03Dollar strength reflects market response to hawkish Fed signals.
- 04Geopolitical developments, including US-Iran relations, may complicate forecasts.
Full Analysis
What the desk is arguing
The desk argues that the USD's trajectory hinges on the outcomes from the Fed's policy meeting this week, especially with Kevin Warsh's new leadership potentially steering a shift in monetary policy. Recent positive economic indicators have put upward pressure on US rates, which has contributed to the dollar regaining its footing against major currencies. Per the source, the elevation in short-term US yields has been particularly pronounced, showcasing the market's anticipation of hawkish signals from the Fed.
Furthermore, the discussion suggests that this meeting is critical not only for US monetary policy but also for setting expectations amid an uncertain global backdrop, including geopolitical developments. Market participants are highly attuned to signals from the Fed, which could bolster or weaken bullish sentiment around the dollar depending on the rhetoric and guidance provided.
Where it sits in our coverage
Currently, our consensus forecasts for the USD/JPY pair are fairly aligned, with targets indicating range-bound trading between 1.04 and 1.12 throughout early 2026. Notably, jpmorgan projects a target of 1.10 for March 2026, reflecting an outlook that broadly aligns with potential dollar strengthening.
In contrast, bofa offers a more conservative figure at 1.04, suggesting some divergence in expectations regarding the Fed's impact on the dollar. Thus, the desk's perspective aligns with the upper bounds of the consensus spread, anticipating a potential breakout above recent highs based on a hawkish Fed stance.
How other firms see it
Several firms, including jpmorgan, are aligned with a bullish outlook for the dollar, underpinned by expectations of further rate hikes from the Fed, while bofa provides a contrary view, projecting weaker performance for the USD against major peers.
As a note, traders should keep an eye on USD/JPY, which may reflect broader sentiments from the Fed's decision-making, as well as ongoing geopolitical developments that can influence risk perception and currency flow.
What the calendar says
With no high-impact events scheduled for the coming month, the focus naturally falls to the upcoming Fed meeting, which will play an outsized role in shaping market sentiment around the dollar and its subsequent movements.
Market Implications
Watch for how the market reacts to changes in short-term US yields, particularly if they cross levels that indicate sustained investor confidence in a rate hike trajectory. The next significant point of attention will be the Fed's meeting outcomes and guidance, which will be pivotal in shaping sentiment around the USD.
From the original
Lee Hardman, Senior Currency Analyst, and Abdul-Ahad Lockhart, Currency Analyst, discuss how building investor optimism over a US-Iran deal and Kevin Warsh’s first policy meeting as Fed Chair are likely to impact the USD. Will another BoJ rate hike be sufficient to trigger a reve
Related speeches
4 itemsFX Daily: Risk assets rally, central banks in focus
The desk envisions a bullish outlook for risk assets driven by geopolitical developments, coupled with a vital week for central bank policy. As the confirmation of a ceasefire between the US and Iran led to a rally in risk assets globally, the consequent cooling in energy prices and softening of the dollar suggests a short-term bullish bias. Per the full note by ing-think, the upcoming FOMC meeting on Wednesday will play a critical role in tempering potential dollar downside, as markets anticipate a firm stance from Fed Chair Kevin Warsh. With seven G10 central banks gathering this week, including notable events in the US, UK, and beyond, we foresee heightened focus on inflation management strategies, particularly following recent inflationary trends.
What’s next for USD/JPY after this week’s sharp correction lower?
The desk sees renewed challenges for USD/JPY following this week's central bank meetings, particularly after the Fed's less hawkish stance and the Bank of Japan's continued commitment to ultra-loose monetary policy. Per the full note from MUFG EMEA, the Fed's decision not to hike rates, coupled with lackluster guidance from Chair Powell, suggests ongoing dollar weakness which has led to a sharp correction in USD/JPY. Current spot trading around 161.6630 places it far from our consensus target of 150 in December 2026, as traders digest this new outlook with limited central bank catalysts on the horizon.