FX Daily: Dollar upside risks are rising rapidly
At a Glance
The desk views a robust upside potential for the U.S. dollar driven by escalating crude prices and tightening monetary policy from the Federal Reserve. Per the full note, a mix of geopolitical tensions, particularly developments in the Gulf region, and rising inflation persistence are rekindling speculations of a Fed rate hike. With market expectations currently pricing in a near 50% chance of a hike this month, the potential for further dollar strength is palpable. As the EUR/USD currently sits at 1.1434, the market is navigating trend changes amidst mixed ECB expectations and geopolitics.
Key Takeaways
- 01The dollar is poised for potential strength due to rising crude prices and inflation concerns.
- 02Speculation of a Fed rate hike has reached significant levels, nearly 50% for July.
- 03The current EUR/USD rate stands at 1.1434, amidst hawkish ECB and Fed signals.
- 04Geopolitical tensions in the Gulf and low U.S. crude inventories add further volatility.
Full Analysis
What the desk is arguing
The desk believes that increasing crude oil prices alongside a hawkish Fed pivot will elevate the dollar. Per the full note, the dollar’s outlook is further buoyed by dwindling U.S. crude inventories that currently stand at their lowest since 1984, sparking inflation concerns that could necessitate an aggressive Fed response.
Currently, the rate differential is providing some support for the EUR/USD, but as oil prices rise, they might overshadow this support. The recent chatter among Fed officials also signals that a short-term rate hike may be on the table if core inflation remains stubborn, fostering a bullish environment for the dollar.
Where it sits in our coverage
The consensus target for EUR/USD is 1.1750, with a range from 1.1200 to 1.2000. Notably, forecasts from firms like deutschebank and goldman suggest targets of 1.2000 and 1.1800 respectively for December 2026.
The desk's perspective aligns closely at the lower end of this range, indicating a potentially more bearish outlook compared to some of the bullish sentiment expressed by other firms.
How other firms see it
Several firms, including jpmorgan and mufg, project sideways momentum for USD with targets close to 1.1800 for December 2026. Conversely, firms like citi suggest a more cautious approach with lower targets around the 1.1300 mark, indicating a divergence in sentiment.
The current trajectory of EUR/USD distinctly correlates with ECB rate path expectations amid fluctuating inflation indicators, hinting at further volatility driven by policy adjustments.
What the calendar says
With no high-impact events on the agenda in the coming month, traders will need to rely heavily on inflation data and Fed communications to assess the evolving landscape.
Market Implications
Focus on levels near 1.1400 for EUR/USD which could offer technical resistance. Monitor Fedspeak closely for signals on potential rate hikes that could add momentum to dollar strength.
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 upside risks are rising rapidly Published 07:50 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Crude has jumped, but still isn’t fully pricing in a fully-fledged new supply shock, meaning short-term risks remain on
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