FX Daily: Dollar hits post-FOMC perfect storm
At a Glance
The desk interprets current market dynamics as a reaction to recent dovish signals from the Federal Reserve and active JPY intervention, contributing to a significant drop in the DXY index. As highlighted in the note from ing-think, the dovish tones from Fed Chair Kevin Warsh and recent weak economic data precipitated a selloff, with the DXY index dipping back below the 100.0 mark. This comes as positioning in the USD is increasingly stretched, suggesting potential for further long-squeezing. Concurrently, concerns around JPY intervention have added to the pressure on the dollar. The upcoming Eurozone CPI data may further influence sentiment. Overall, while we might see stabilization, the desk remains cautious about signaling a bottom in this dollar weakness.
Key Takeaways
Full Analysis
What the desk is arguing
The desk highlights that the combination of the Fed's dovish surprise and aggressive JPY intervention has created a challenging environment for the dollar, pushing the DXY lower. Per the full note, this brings USD levels close to those seen during earlier bullish sentiments expressed by Warsh in June, suggesting a serious shift in trader sentiment.
Recent economic indicators reflect this sentiment, with Core PCE rising only 0.1% in June and Q2 growth trailing at 1.5%, reinforcing fears that the Fed might struggle to enact tighter policy in the face of such data. Furthermore, USD/JPY's plunge over 3% in response to JPY interventions showcases a broader shift in market sentiment against the dollar.
Where it sits in our coverage
The current spot for EUR/USD is at 1.1533, with consensus targets for December 2026 ranging widely among firms. Notably, some forecasts include Morgan Stanley at 1.1600, Deutsche Bank at 1.2500, and Citi at 1.1550.
The desk’s outlook appears positioned centrally in the consensus spread, highlighting a range of potential scenarios for the euro against the greenback, with corporate targets suggesting the potential for weakness in the dollar against the euro, particularly in light of potential Eurozone economic strength.
How other firms see it
A range of firms aligns with the desk’s view, including Morgan Stanley, Citi, and Deutsche Bank, all reflecting a bearish stance towards the dollar. Conversely, firms like HSBC and Goldman suggest more caution, with their forecasts indicating a firmer stance on the dollar's resilience.
The trajectory of EUR/USD is closely linked with both the Fed’s rate path and the upcoming CPI releases, which are crucial indicators of broader economic health in both regions, impacting trading dynamics in the USD.
Market Implications
Watch for potential rebounds in DXY if U.S. economic data shows unexpected strength while keeping an eye on position adjustments in EUR/USD around the Eurozone CPI reading. A break below the 1.1500 level could signal further bearishness for the dollar.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Bank of America | Bearish | 1.1200 |
ANZ | Bearish | 1.1400 |
UOB | Bullish | 1.1565 |
From the original
Articles FX Daily: Dollar hits post-FOMC perfect storm Published 07:07 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The hangover from a dovish Fed surprise, paired with JPY intervention ahead of this morning’s BoJ hold, has taken DXY back
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The desk views the recent decline in USD/JPY, which has dropped 3.5% on heavy volumes, as a sign of potential intervention by Japanese authorities capitalizing on dollar weakness following the Fed's dovish signals. Per the full note from ing-think, the timing aligns with indications from Fed officials that suggest a pause on rate hikes is possible, particularly after the lower-than-expected US June core PCE data bolstered this outlook. With Japanese authorities possibly targeting intervention levels of around $70 billion, the sustainability of this currency movement hinges on both Fed policy and a hawkish pivot from the Bank of Japan. The broader backdrop points towards a constrained Japanese FX intervention strategy due to finite reserves, which are forecasted to dip below $1 trillion if the recent interventions continue.
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