From USD debasement fears to a Fed policy rethink
At a Glance
The desk posits a cautious outlook for USD pairs following the latest remarks from Fed Chair Kevin Warsh at Jackson Hole, highlighting a recalibration of market expectations around future Fed policy. Per the full note from MUFG EMEA, discussions emphasize concern over inflation not reverting to the 2% target swiftly, despite core PCE still elevated at 3.3%. The bleak assessment of financial conditions suggests a limited capacity for USD strength against other major currencies. As we look ahead, the lack of high-impact calendar events could leave traders reacting to market sentiment and economic data in the interim.
Key Takeaways
- 01The desk is cautious on USD strength following Fed Chair Warsh's speech, emphasizing inflation concerns.
- 02Market consensus sees limited expectation for a September rate hike, with only 8-9bps priced in.
- 03The projection for EUR/USD is consistent with moderate targets across various firms, reflecting bearish sentiment on USD.
- 04USD/JPY will be critical to monitor, given the implications of Fed policy shifts against the BOJ's stance.
Full Analysis
What the desk is arguing
The desk frames this as a pivotal moment for the USD, with concerns about inflation and Federal Reserve credibility coming to the forefront. According to MUFG's analysis, market pricing for a rate hike in September was only around eight to nine basis points heading into Warsh's speech, indicating minimal expectations for immediate policy changes.
Derek Halpenny pointed out that even with inflation trends, financial constraints don't appear sufficiently tight to justify aggressive Fed actions. The commentary suggests that should inflation continue to miss target expectations, the belief in a strong USD could weaken, particularly against currencies like the EUR and GBP.
Where it sits in our coverage
For EUR/USD, our consensus target is 1.1700, with a range between 1.1200 and 1.2000. Notably, firms such as stanchart and ing project targets of 1.1400 and 1.1700 for March 2026, respectively, reflecting a modest divergence in outlook.
This perspective aligns closely with the lower bounds of the forecast spectrum, where several firms maintain conservative targets, suggesting minimal expected appreciation for the USD against the euro.
How other firms see it
Several firms, including ubs and morganstanley, hold relatively optimistic views on GBP/USD, projecting targets towards the higher end of the range. In contrast, nomura and commerzbank express more bearish sentiments, forecasting lower exchange rates for the pound.
Additionally, movements in USD/JPY could also reflect the broader implications of Fed policy, particularly given the BOJ’s current stance, which may further influence USD movement over the coming months.
Market Implications
Watch for potential shifts in sentiment around incoming inflation data, as any significant deviation could impact the USD's performance against the EUR and GBP, particularly as targets are closely clustered around current levels.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
BNP Paribas | Bearish | 1.1500 |
UBS | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
From the original
Derek Halpenny, Head of Research Global Markets EMEA & International Securities sits down with Simon Mayes, Head of UK, Ireland & Swiss FX Corporate Sales to discuss the key takeaways from the Jackson Hole speech by Fed Chair Kevin Warsh. Derek also discusses the fleeting USD deb
Related speeches
4 itemsFX Daily: Keeping an eye on the long end
The desk believes that the upcoming speech by Fed Chair Kevin Warsh at the Jackson Hole symposium could provide key insights into the direction of long-dated US Treasuries, influencing FX markets significantly. With low volatility affecting FX pairs like EUR/USD, GBP/USD, and USD/JPY, market participants are particularly focused on any signals Warsh may give regarding monetary policy. Per the full note, if Warsh adopts a hawkish tone, it might strengthen the dollar against low-yielding currencies like CHF and JPY. Conversely, any dovish sentiment emphasizing financial innovation over policy could see carry currencies underperform, especially if Treasury yields rise sharply, potentially revisiting the 5.30% mark for 30-year bonds.
A pivotal week for the USD?
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.
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