Fed hawkishness and energy slump drive dollar higher, but MUFG sees gains fading
At a Glance
The dollar's recent breakout above its year-long trading range, driven by hawkish Fed rhetoric and declining energy prices, suggests the potential for continued near-term gains against the euro. Per the full note from MUFG, while positioning momentum is still underpinned by IMM's long-USD exposure, which remains significantly lower than early-year peaks, it's essential to note that the market is responding to both monetary policy divergence and the collapse of Brent crude prices. This backdrop leaves EUR/USD vulnerable, especially if the Fed continues to signal additional rate hikes, despite a broader outlook for recovery into the 1.1400 to 1.1800 range as outlined by consensus. With no significant calendar events on the horizon to drive volatility, the focus will remain on positioning adjustments in the meantime.
Key Takeaways
- 01The dollar's breakout suggests potential for further near-term gains, especially against the euro.
- 02Positioning in long-USD remains under-levered compared to earlier in the year, allowing for upward room.
- 03Brent crude's sharp drop impacts European rates, amplifying the yield gap against the U.S. dollar.
- 04The Fed's hawkish guidance indicates a shifting monetary landscape that could underpin USD strength.
Full Analysis
What the desk is arguing
The desk believes the dollar's recent momentum can sustain further gains in the short term, particularly against the euro, as signs of a hawkish Fed reverberate through the market. Per the full note from MUFG, the dollar index has moved above resistance levels, with expectations for further accumulation in long-USD positions still possible given the low current IMM exposure relative to earlier in the year.
Key to this bullish sentiment is the stark decline in Brent crude prices, now fully reversing the gains from conflict-driven spikes. This has led to refined European rate expectations, pressuring EUR/USD downward amidst a widening yield differential as U.S. rates remain comparatively elevated due to the Fed's posture.
Where it sits in our coverage
Our consensus target for EUR/USD is currently at 1.1700, with a range stretching from 1.1200 to 1.2000. Specifically, firms are aligned with targets such as: - mufg: Dec26 1.2400 - goldman: Dec26 1.2000 - jpmorgan: Dec26 1.1300
This view positions our outlook within the higher range of expectations across the market, as a potential retracement toward the 1.1400 level overlaps with MUFG’s assertion of short-term dollar strength.
How other firms see it
Firms such as hsbc and scotiabank express a cautious optimism, forecasting a range of targets around the current levels while maintaining tighter estimates. On the contrary, deutschebank and citi appear more bearish, with projections reflecting a weaker euro outlook.
Key indicators like the ECB's rate decisions and U.S. inflation statistics remain pivotal influencing factors, especially as shifts in these areas could provide clarity on future EUR/USD trajectories.
Market Implications
Focus on the EUR/USD parity against the key level of 1.1000 as a psychological threshold while observing the lack of calendar events for fresh impetus. Look out for positioning shifts and updates on Fed statements as they could amplify current trends.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2027 |
|---|---|---|
Goldman Sachs | Bearish | 1.1200 |
UOB | Neutral | 1.1450 |
Citi | Bearish | 1.1000 |
From the original
The dollar's breakout above its year-long trading range has reactivated positioning momentum, with IMM long-USD exposure still well below early-year peaks, leaving room for further near-term accumulation. Options flow is signalling stronger conviction for USD gains against the eu
Related speeches
4 itemsFX Talking: Dollar downturn delayed
The desk maintains a relatively bullish view on the dollar's strength as improvements in Middle East sentiment and sustained Fed tightening expectations suggest a delayed downturn for the greenback. As highlighted in the source commentary, the Fed's anticipated policy adjustments are likely to sustain this strength into the third quarter, with inflation remaining a persistent challenge. Given the current inflation rate exceeding 4% and robust employment data, the prospect of a dollar decline appears postponed until 2027, leading to projections for EUR/USD to potentially dip to the 1.13-1.14 level. However, the consensus remains divided, with different outlooks for major pairs like USD/JPY and EUR/USD potentially influenced by upcoming ECB and Fed decisions.
FX Daily: Looking for stabilisation
The desk interprets current market dynamics as a moment of stabilization for the euro, anticipating a potential rebound against a strong dollar. Per the full note, this calm in risk sentiment could allow EUR/USD to maintain levels above 1.130. In light of expected US data, particularly the core PCE, the path forward suggests a bearish USD potential, with the market pricing in a quasi-dovish Fed stance for December. Recent consensus reflects a broad range for EUR/USD targets, indicating a divided outlook among leading firms.