FX Daily: Dollar rally needs more risk-off fuel
At a Glance
The desk is positioning for a tempered dollar rally, suggesting that current strength hinges on sustained risk-off sentiment. Per the full note from ing-think, while the dollar has strengthened following last Thursday’s tech-led sell-off and strong US jobs data, the potential for correction looms unless negative market sentiment continues. Despite the recent uptick, with the dollar's DXY index moving upward, we caution that a softening in short-term US rates could push the dollar lower if risk appetite returns.
Key Takeaways
- 01The dollar's recent strength depends heavily on maintained risk-off sentiment.
- 02US jobs numbers have boosted the dollar, but short-term rate dynamics could lead to losses.
- 03Caution is warranted as many high-beta currencies are declining alongside the dollar's rise.
- 04DXY index corrections are plausible if risk sentiment shifts toward recovery.
Full Analysis
What the desk is arguing
The desk frames this as a cautious outlook for the dollar rally, which may already appear overstretched. Support for this perspective arises from the fresh US jobs report, which revealed a surprising 165,000 payroll addition, enhancing the dollar's appeal. However, scrutiny remains on broader market sentiments and defensive stock movements, which need to persist for further dollar strength to materialize.
Furthermore, recent dollar gains have not been echoed across all currency pairs, particularly affecting higher-beta G10 currencies like the Australian dollar and Swedish krona, which have seen notable declines. This suggests that unless a continued risk-off trajectory keeps pressure on the higher-beta currencies, corrective moves in the dollar could emerge sooner rather than later.
Where it sits in our coverage
Our consensus target for EUR/USD currently stands at 1.1373, with a median range of 1.1162 to 1.2000 across various firms. Notable targets for Dec-26 include: - rbc: 1.2000 - mizuho: 1.1600 - hsbc: 1.1000
The desk's cautious stance aligns well within this multitude of forecasts, particularly noting that some major firms are positioning towards the upper range of the consensus, capturing the potential for a bullish EUR/USD move, while a few, including nomura, expect a further strengthening of the euro.
How other firms see it
Aligned firms remain cautiously optimistic, looking for the dollar to stabilize but acknowledging potential volatility based on risk sentiment shifts, while some contrary firms foresee a dollar decline against the euro over the coming months. Notably, we highlight the perspectives of bofa and scotiabank, who expect movements contrary to the desk’s outlook.
The outlook for EUR/USD will be closely tied to US CPI metrics and the imminent shifts in broader monetary policy, especially as markets watch for any rhetoric from central banks regarding inflation management strategies.
Market Implications
Traders should focus on the DXY index's ability to hold above recent highs and monitor for sentiment shifts, particularly with key US CPI data releasing soon. A failure to maintain these gains could signal a shift for EUR/USD potentially moving toward the upper consensus targets.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UBS | Bullish | 1.1600 |
Scotiabank | Bearish | 1.0900 |
MUFG | Neutral | 1.1200 |
From the original
Articles FX Daily: Dollar rally needs more risk-off fuel Published 07:56 FX Translate Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Contagion from AI to defensive stocks in the US and worldwide allowed the dollar to rally even before the strong US j
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The desk reinforces the bullish sentiment on the dollar as the DXY dollar index approaches 101.80, bolstered by resilient US economic activity that continues to support Fed hawkishness. Per the full note from ing-think, recent softer-than-expected inflation data hasn't significantly altered market expectations for further rate hikes, as evidenced by a quick retracement in short-dated interest rates following the data release. With the upcoming US nonfarm payrolls and other key economic data, the backdrop remains constructive for dollar strength, particularly against the backdrop of weakening performance in EUR/USD.