FX Daily: Dollar bears chase totality
At a Glance
The desk anticipates that a soft US July CPI print could dampen expectations for a September rate hike by the Fed, providing an opportunity for dollar bears. This sentiment is underscored by projections of 0.1% month-on-month inflation for headline and 0.2% for core, which would lead year-on-year rates to fall to 3.4% and 2.5%, respectively. A soft CPI print could lead to a bullish steepening of the yield curve and a softening of the dollar, particularly against procyclical currencies like the euro. Per the full note source, the prospect of declining inflation could also support risk assets more broadly, positioning for favorable outcomes in the markets ahead.
Key Takeaways
- 01A soft US CPI reading could meaningfully reduce Fed rate hike expectations.
- 02Consensus predicts a benign drop in dollar values, enhancing risk asset appeal.
- 03Central to this is a potential core inflation reading of just 0.1% month-on-month.
- 04Watch for shifts in the yield curve reflecting changing market sentiments.
Full Analysis
What the desk is arguing
The desk argues that a softer-than-expected US July CPI report could significantly impact Fed policy expectations and subsequently pressure the dollar. A consensus of soft numbers is anticipated, particularly due to lower gasoline prices and easing wage growth contributing to core inflation rates falling to near the Fed's 2% target. This could help translate into diminished likelihood for a September rate hike, moving market sentiments toward a more risk-on approach.
Particularly, dollar bears are optimistic that a CPI reading of 0.1% month-on-month on core inflation is not only feasible but could eliminate the 50% probability currently ascribed to a rate hike in September. As markets recalibrate, the expected outcome is a benign dollar drop and increases in risk appetite, especially amongst cyclical currencies, suggesting a shift towards a more favorable risk environment.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.1700, with a range between 1.1200 and 1.2000. Notable firm targets include: - goldman: 1.1200 (Dec-26) - bofa: 1.1240 (Dec-26) - deutschebank: 1.1620 (Dec-26)
This view aligns closely with broader market expectations, but it does reflect a somewhat aggressive stance considering the lower end of the current forecast spectrum; firms such as bofa are notably less optimistic with targets towards the 1.1 area.
How other firms see it
Several firms align with this view, anticipating a weaker dollar against a backdrop of easing inflation pressures, including morganstanley and deutschebank. Conversely, firms like investec and citi are positioned more cautiously, projecting comparatively grounded targets.
Related market dynamics to watch include the USD/JPY movement and Fed communication, which may further inform the dollar's trajectory as inflationary data unfolds. The ongoing interaction between these currencies signals a larger narrative surrounding risk assets and central bank policy across major economies.
Market Implications
Watch for the EUR/USD to approach upwards of 1.17 if the US CPI results meet or are softer than expectations, particularly given the bullish sentiment surrounding procyclical currencies. The positioning of traders ahead of the upcoming data is pivotal in shaping immediate market reactions.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Société Générale | Bearish | 1.1400 |
Scotiabank | Bearish | 1.1200 |
Commerzbank | Bullish | 1.2200 |
From the original
Articles FX Daily: Dollar bears chase totality Published 07:40 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Dollar bears will be hoping that today's US July CPI release is soft enough to banish expectations of a September rate hike from the Fed.
Related speeches
4 itemsEasing US price pressure dampen imminent Fed hike talk
The desk believes that the significantly softer US CPI data for June will lead to a recalibration of rate hike expectations from the Federal Reserve, thereby tempering USD bullishness in the short term. As per the full note from ING, headline inflation printed at -0.4% month-on-month, contrasting markedly with the expected -0.1%, pushing the annual rate down to 3.5% from 4.2%. This shift suggests a longer pause in Fed rate increases, impacting short-term USD positioning as traders adjust their forecasts. With no major economic events impacting the dollar in the next month, this environment is conducive to consolidation around current levels.
FX Daily: Dollar debasement trade in retreat
The desk views the dollar as maintaining its support ahead of a critical US May CPI release, as detailed in the latest research from ING. With real rates having surged by 60 basis points over the past six weeks, market participants are anticipating a likely December Fed rate hike contingent on core CPI performance. This sets the stage for potential dollar strength unless today's CPI data reveals weaknesses in consumer spending, particularly in the shelter sector, which might soften short-term rates and, by extension, the dollar's value. Per the full note, a solid core CPI number today would likely fortify bullish sentiment around the dollar.