FX: Cyclical dollar bullishness takes over
At a Glance
The desk is adopting a bullish stance on the US dollar, aligned with emerging cyclical factors suggesting a rally. Per the full note from ing-think, investor sentiment has shifted significantly from fears of a structural dollar decline to anticipation of a cyclical rebound, in part due to a prolonged period of tighter US monetary policy. Current data highlights that European buy-side hedge ratios for the dollar have returned to under-hedged positions at around 68%, underscoring confidence in holding dollar-denominated assets. Meanwhile, the consensus target for EUR/USD currently sits at 1.1717, with projections pointing to a gradual ascent towards 1.2000 by year-end. This context underscores the pivotal role of evolving US monetary dynamics, particularly as recent forecasts suggest no immediate high-impact events ahead that might disrupt this trajectory.
Key Takeaways
- 01The market sentiment is shifting towards a cyclical dollar rally as confidence grows in holding dollar assets.
- 02European investors are currently under-hedged on their dollar exposure, suggesting a favorable environment for dollar strength.
- 03The consensus target for EUR/USD indicates a gradual bullish outlook, likely influenced by the prevailing US monetary policies.
- 04No significant calendar events are anticipated in the near term that could disrupt this evolving FX landscape.
Full Analysis
What the desk is arguing
The desk believes cyclical factors are now driving dollar strength, marking a distinct shift from the previous narrative of structural vulnerability. Per the full note by ing-think, the current positioning indicates a renewed confidence among investors in the dollar, as indicated by a movement towards lower hedge ratios in euros.
Supporting this bullish outlook, European buy-side data reveals dollar hedge ratios have dipped to about 68%, well below the normal 73% expected level. This suggests that there is a growing willingness to accept FX risk, which contrasts sharply with the recent past when the dollar was seen as structurally weak and over-hedged.
Where it sits in our coverage
Our current spot for EUR/USD stands at 1.1679, with a consensus target for March 2026 of 1.1717, which spans a range from 1.1200 to 1.2000. Notably, firms such as Commerzbank and Barclays have set their December targets at 1.2200 and 1.2100, respectively.
This view aligns closely with the upper bound of current forecasts, particularly with barclays expecting a target of 1.2100 by December 2026, indicating a general alignment among firms for a bullish euro outlook against the dollar amidst the shifting dynamics.
How other firms see it
Several firms are aligned with this bullish dollar narrative, including bnpparibas, which is forecasting 1.2100 for December 2026, and mizuho, targeting 1.1700 for the same period. Conversely, wellsfargo and anz exhibit a more cautious view, projecting lower levels of only 1.2000 and 1.1400, respectively, reflecting divergent perspectives on the dollar's strength.
Monitoring USD/JPY may also be crucial, as the trajectory of that pair could indicate broader sentiment shifts in the FX market, particularly in light of ongoing monetary discussions in Japan and the US Federal Reserve's stance on interest rates.
Market Implications
Traders should keep a close watch on the EUR/USD level around 1.1679; a breach above this could signal momentum towards the consensus target of 1.1717. Additionally, tracking USD/JPY might offer insights into shifts in dollar sentiment, especially as market participants remain attentive to interest rate trajectories from the US Federal Reserve.
From the original
Articles FX: Cyclical dollar bullishness takes over 10:33 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download After much discussion about a structural decline in the dollar last year, investor sentiment is now swinging towards a cyclical dollar rally.
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