FX Daily: Dollar price action quite poor
At a Glance
The desk highlights a period of notable weakness in the US dollar despite supportive fundamentals such as elevated energy prices and firm short-dated US interest rates. Per the full note from ING, the subpar performance of the dollar is attributed to a combination of low-volatility investment flows away from the dollar and high volatility in USD/JPY as macro hedge funds position for a potential move below 150. With a Friday US CPI release expected to frame the Fed's next steps, the current softness in the dollar raises questions about market positioning amidst stable global equity indexes and expectations for a forthcoming 25bp rate hike from the Fed. This ongoing situation is in contrast to the increasingly bullish sentiment displayed towards both the euro and the pound, as indicated by recent consensus forecasts.
Key Takeaways
- 01The US dollar's recent performance is disappointing despite supportive factors.
- 02Elevated energy prices and high US short-term interest rates are not translating into dollar strength.
- 03Low volatility in financial markets is promoting a shift away from the dollar.
- 04USD/JPY remains in focus as volatility increases amidst macro positioning.
Full Analysis
What the desk is arguing
The desk frames this as a puzzling moment for the dollar, with several supportive factors seemingly having little effect on its strength. The observation from ING indicates that heightened energy prices should favor the dollar's position by driving trade flows, yet it remains under pressure from persistent low volatility in investments.
Supporting this view, short-dated US interest rates have held steady as the market anticipates Friday's CPI report, which may solidify expectations for an imminent Fed rate hike. Despite these positive signs, the recent negative correlation between equities and dollar strength suggests capital may be flowing elsewhere, particularly into global equities amidst a resilient growth narrative fueled by AI.
Where it sits in our coverage
Currently, our consensus for EUR/USD is at 1.1700, with a range between 1.1200 and 1.2000. Notably, ing projects the pair to reach 1.1700 by March 2026, while morganstanley and rbc anticipate slightly stronger outcomes of 1.2000 and 1.1700 respectively, illustrating a broadly bullish outlook on the euro against the dollar.
How other firms see it
Firms such as morganstanley and rbc are aligned with a bullish sentiment towards the euro and pound, projecting upward movement against the dollar, contrasting with nomura, which anticipates a weaker euro by the end of March 2026 with a target of 1.3200. The ongoing dollar dynamics suggest that traders should keep a close eye on USD/JPY movements, especially in light of potential policy shifts from the BoJ that could exacerbate the dollar's vulnerabilities.
Market Implications
Traders should watch the USD/JPY pair closely, especially for signs of a breakdown below the 150 level, which could trigger further dollar weakness. Additionally, the upcoming US CPI report on Friday will be crucial in shaping expectations around the Fed's next policy moves, particularly in the context of the anticipated rate hike.
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: Dollar price action quite poor Published 07:45 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Despite higher energy prices and firm short-dated US interest rates, the dollar remains soft. Wild swings in USD/JPY remain the main e
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The desk highlights a noticeable uptick in the dollar's performance as it aligns with several positive short-term drivers, including robust front-end rates, escalating energy prices, and diminished risk appetite. Per the full note [source], the DXY index experienced its strongest session since the Jackson Hole speech, a testament to these supportive macroeconomic indicators. Currently, the market's attention is likely focused on the Fed's impending FOMC announcement, which may heighten volatility for the dollar in the short term, particularly if any signs of rate hikes are reinforced. Our current assessment of the USD position is also informed by the latest trend in Treasury yields, which pushed the 10-year rate to 5.0%, maintaining a tolerable premium over the estimates for neutral rates.
FX Daily: Dollar hits post-FOMC perfect storm
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.