FX Daily: Energy and carry dominate near term
At a Glance
In the current FX landscape, the dollar is gaining strength as rising energy prices and geopolitical tensions in the Gulf heighten demand for the greenback across low-yielding currencies such as the euro. Per the full note, the desk notes that higher natural gas prices are particularly troubling for Europe, where inventories are low. This scenario is expected to keep Fed tightening fears alive, thereby supporting the dollar against its peers. Consensus expectations are influenced by anticipated core inflation data, with the upcoming CPI print and Fed chair Kevin Warsh's testimony likely to provide further market direction.
Key Takeaways
- 01Dollar remains strong amid rising energy prices and geopolitical tensions.
- 02European vulnerabilities, particularly in energy, keep the euro under pressure.
- 03Upcoming U.S. inflation data and Fed testimonies could further influence market movements.
- 04Cross-market divergence is apparent, particularly with JPY and CHF in reaction to dollar strength.
Full Analysis
What the desk is arguing
The desk argues that the strengthening dollar is driven by escalating energy prices and geopolitical uncertainties, particularly surrounding energy supplies from the Gulf region. Per the full note, concerns about natural gas prices in Europe, coupled with a lack of clarity from the Federal Reserve, will create ongoing demand for the dollar against lower-yielding counterparts.
Support for this assertion comes from the anticipation of inflationary pressures that could prompt the Fed to pursue further tightening measures. The expectation is that tighter monetary policy will not only stem from rising domestic inflation rates but also resonate across the G10 currencies, compelling a look at energy prices as a critical factor.
Where it sits in our coverage
For the EUR/USD pair, our internal consensus target stands at 1.1700, with a range from 1.1200 to 1.2000. Notably, citi is projecting a March 2026 target of 1.1300 while goldman sees it at 1.1800 for the same period. The desk's view positions the dollar outlook in line with the lower bound of expectations in the marketplace, suggesting widespread concerns surrounding European economic resilience.
How other firms see it
On one hand, firms such as goldman and mufg share a more bullish outlook on the euro, aiming for higher targets as the market considers potential stabilization in European energy supplies. Conversely, citi and scotiabank anticipate a weaker euro in response to persistent dollar strength driven by energy dynamics.
With respect to the JPY and CHF, the divergence between the USD and other low-yielding currencies could further signify the strategic positioning of traders amidst a complicated macro backdrop, driven principally by energy-facing inflation and geopolitical tensions.
Market Implications
Traders should monitor the upcoming CPI data and Fed Chair Kevin Warsh's testimony closely, as they carry implications for future rate hikes and market sentiments surrounding inflation. A decisive movement below EUR/USD 1.1400 could indicate further dollar strength, reinforcing current bullish positions.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Neutral | 1.1450 |
Citi | Bearish | 1.1000 |
MUFG | Bullish | 1.1800 |
From the original
Articles FX Daily: Energy and carry dominate near term Published 07:54 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The deteriorating situation in the Gulf and the rise in energy prices are supporting the dollar against the low-yielders, includi