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 2026 |
|---|---|---|
MUFG | Bullish | 1.1800 |
Danske Bank | Bearish | 1.1100 |
UBS | Bullish | 1.1800 |
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 Daily: Dollar resilience builds
The desk maintains a bullish view on the dollar's resilience, driven predominantly by hawkish signals from the Federal Reserve amidst falling oil prices. Per the full note from ing-think, this environment suggests limited downside for USD, especially against the EUR as market participants remain anchored to Fed hike expectations. Recent labor market data supports expectations for a strong payroll print, further solidifying the dollar's strength. Our current consensus for EUR/USD sits at 1.1684, indicating a cautious outlook on eurozone monetary policy amid these developments.
FX Daily: Dollar upside risks are rising rapidly
The desk views a robust upside potential for the U.S. dollar driven by escalating crude prices and tightening monetary policy from the Federal Reserve. Per the full note, a mix of geopolitical tensions, particularly developments in the Gulf region, and rising inflation persistence are rekindling speculations of a Fed rate hike. With market expectations currently pricing in a near 50% chance of a hike this month, the potential for further dollar strength is palpable. As the EUR/USD currently sits at 1.1434, the market is navigating trend changes amidst mixed ECB expectations and geopolitics.
More like this
5 itemsFed's Cook names two inflation worries: the AI buildout and persistent supply shocks
Fed's Jefferson: Weighing more data will allow the Fed to make a better call on rates
Fed’s Schmid: Rising long-term rates are starting to strain housing and commercial lending
ICYMI: BOJ opinions and tankan both point to more rate hikes after September's move