FX Daily: CPI can seal the deal on a Fed hike
At a Glance
Lead — The desk positions that today's CPI release is pivotal in solidifying expectations for a Federal Reserve rate hike. Per the full note from ING, current market pricing reflects only an 18 basis point increase for next week's FOMC meeting, suggesting that only a slight upside surprise is necessary to shift sentiment significantly. Given the USD's positive correlation with U.S. Treasury yield movements, this comes amid a backdrop where oil prices surged, enhancing inflationary pressures. However, hawkish positioning from the ECB poses a risk for a more pronounced downside in EUR/USD, as highlighted in recent currency assessments.
Key Takeaways
Full Analysis
What the desk is arguing
The desk argues that today's CPI reading could decisively influence the Fed's rate hike trajectory, potentially allowing the market to fully price in a September increase. Per the full note, a modest surprise in CPI metrics could elevate expectations dramatically, given that current pricing suggests only an 18 basis point bump is anticipated.
The inflation consensus is set at 0.2% for core CPI and 0.4% for headline CPI, which aligns with ING's expectations. Additionally, factors such as the more aggressive stance from the ECB and rising oil prices add complexity to the Fed's decision-making framework, suggesting an intricate environment moving forward.
Where it sits in our coverage
Our internal consensus target for EUR/USD is 1.1678, with a median of 1.1700 across various firms. Key contributors include rbc with a December 2026 target of 1.1700 and morganstanley at 1.2000 for the same timeframe.
This desk's view is at the lower end of the spread relative to morganstanley's more aggressive targets, indicating a cautious stance on the euro's near-term potential against a strengthening USD. The divergence reflects broader market uncertainties, especially with hawkish sentiments emerging from the ECB.
How other firms see it
Aligned firms reflect a generally bearish outlook on EUR/USD in the near term, with goldman and scotiabank estimating the pair's December year-end target around 1.35 and 1.34, indicating some room for further downside. Conversely, firms like morganstanley maintain higher targets, emphasizing a potential EUR resilience in the medium term.
As dovish guidance from the ECB juxtaposes with potential Fed tightening, the interplay of these central bank policies will shape the EUR/USD trajectory. Keep an eye on how the GBP/USD movements interact with these dynamics, especially in light of upcoming BoE comments.
Market Implications
Watch for a potential breach of key resistance at 1.17 in EUR/USD, which analysts are watching closely. The CPI print later today will be a key driver of sentiment ahead of the Fed meeting, making it essential to monitor those expectations closely.
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
Articles FX Daily: CPI can seal the deal on a Fed hike Published 07:54 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The bond market remains in turmoil, but this time the USD is reacting positively. This tentative rebuilding of a USD-back-end yie
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4 itemsFederal Reserve hikes 25bp, suggests another to come
Lead — The Federal Reserve's recent 25 basis point rate hike, coupled with indications of a potential second hike later this year, suggests a robust stance against inflation as outlined in the commentary. Per the full note, Chair Kevin Warsh's approach reflects confidence in solid economic activity while still acknowledging heightened uncertainty. Market pricing had already anticipated this move based on strong employment and inflation metrics. Current consensus suggests steady targets moving forward, with traders closely monitoring the implications for EUR/USD and GBP/USD.
Rates Spark: A higher real starting point
Lead — The desk contemplates a firm repricing of FX currencies as tighter monetary policies come into sharper focus, with rising oil prices acting as a significant catalyst. As noted in the commentary, market expectations are already reflecting potential European Central Bank rate hikes by September, underscoring a shift in sentiment on real rates. Current consensus shows GBP/USD trading notably beneath forecasts, while EUR/USD remains similarly positioned. Traders should be watchful of any inflation data releases that could sway Central Bank positioning.