FX Daily: Dollar debasement trade in retreat
At a Glance
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.
Key Takeaways
Full Analysis
What the desk is arguing
The desk is arguing that the dollar is likely to remain well-supported in anticipation of the US May CPI release. As noted in the source commentary, expectations of a Fed response to rising inflation have seen real rates rise significantly, reversing the trend of last year's dollar debasement in the process.
The key detail to monitor today is the core CPI, which is projected to show a 0.3% month-on-month increase and 2.9% year-on-year. Should these figures manifest as forecasted, the anticipation of a Fed hike in December will likely keep the dollar on the bid side, reinforcing the narrative of a strong dollar backed by robust inflation data.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.1700, with a range of 1.1200 to 1.2000 by December 2026. Notable firm targets include: - mizuho: 1.1700 - barclays: 1.2100 - jpmorgan: 1.2000
This position marks a slight alignment with the broader consensus; however, it sits at the higher end of the projections, signaling a bullish sentiment regarding the dollar's trajectory against the euro.
How other firms see it
Aligned firms such as mizuho and jpmorgan anticipate continued dollar strength based on forthcoming economic data. Conversely, firms like citi position themselves more conservatively, favoring a lower euro target by December 2026.
The trajectory for USD/CAD, reflecting BoC rate paths, is also relevant, as shifts in oil prices could impact this pair in conjunction with any dollar movements post-CPI release.
Market Implications
Traders should watch for the core CPI release today, as a stronger print would solidify a bullish outlook on the dollar. Key levels to monitor include current spots for EUR/USD at 1.1600 and USD/CAD at 1.4000.
From the original
Articles FX Daily: Dollar debasement trade in retreat 07:52 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The dollar remains reasonably supported as the market awaits today's US May CPI release. Growing expectations that the Fed will have to resp
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