FX Daily: 50/50 Fed call keeps risk assets in demand
At a Glance
Current dynamics in the FX market indicate a resilient demand for risk assets, spurred by dovish comments from Fed's Christopher Waller, which have led to declines in US yields and the dollar. This sentiment aligns with a current 50% probability of a Fed rate hike in September, suggesting traders are cautious but optimistic. Per the full note, the forthcoming US non-farm payrolls are expected to be underwhelming, which, if realized, may strengthen the case for holding rates steady. This sets the stage for ongoing strength in high-yield currencies like the EUR and GBP, with market sentiment leaning towards demand for these currencies amidst a backdrop of stabilizing risk appetite.
Key Takeaways
Full Analysis
What the desk is arguing
The desk is focused on the prevailing demand for high-yield currencies, driven by the Fed's seemingly dovish stance as articulated by Waller's recent comments. This reflects a pivotal shift as market participants recalibrate their expectations on US interest rates, potentially favoring non-USD assets in the near term.
Specifically, Waller's remarks have necessitated a rethinking of rate hike probabilities, with the market now pricing in a 50% chance of a hike versus the previously more hawkish stance. This has manifested in a measurable 5 basis points drop in short-dated US yields and a notable softening of USD/JPY toward 155, suggesting a positive shift for procyclical currencies.
Where it sits in our coverage
For the EUR/USD pair, our current spot is 1.1446 with a median Dec-26 target of 1.1700, reflecting a range from 1.1200 to 1.2000. Key firms supporting similar targets include ing (1.1700), rbc (1.1700), and morganstanley (1.2000).
This view shows alignment with broader market expectations but sits comfortably within the median range established by cross-firm forecasts, indicating potential for further upside in procyclical currencies if current trends continue.
How other firms see it
Firms that align with this perspective include ubs and barclays, both showing positive targets for the euro in the medium term, while firms like nomura and jpmorgan express slightly more cautious attitudes.
The trajectory of EUR/USD aligns with upcoming ECB policy considerations, as expectations of ECB actions will weigh heavily on Eurodollar dynamics in the coming months. Similarly, the upcoming US job data will be critical for shaping the narrative around the USD's short-term outlook.
Market Implications
Traders should closely monitor the 155 level in USD/JPY, alongside the upcoming non-farm payrolls, for any shifts in positioning. Positive surprises in payrolls could energize the dollar, while disappointing results may maintain the euro's momentum towards the 1.1700 target.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bearish | 1.1140 |
ABN AMRO | Bullish | 1.1500 |
Bank of America | Bullish | 1.1500 |
From the original
Articles FX Daily: 50/50 Fed call keeps risk assets in demand Published 07:50 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Some surprisingly dovish remarks from the Fed's Christopher Waller yesterday sent US yields and the dollar lower, while at
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