FX Daily: Fed pricing and tech indigestion bolster dollar
At a Glance
The dollar is gaining momentum, primarily driven by bullish Fed pricing and a backdrop of risk aversion triggered by a tech sector sell-off. Per the full note source, the market is currently pricing in nearly 30bp of Federal Reserve rate increases by the end of the year, alongside a warning of potential second-round inflation effects stemming from recent jobs data. This dynamic positions the dollar favorably, particularly ahead of the May CPI data release which is anticipated to show a YoY increase of over 4%.
Key Takeaways
- 01The dollar is benefitting from hawkish Fed pricing and tech sector weakness.
- 0230bp of Fed tightening is being priced in for 2026, bolstered by recent jobs data.
- 03Investors are adjusting portfolios, leading to a potential spillover into broader market movements.
- 04CPI release expected to show an increase above 4% YoY, reinforcing dollar strength.
Full Analysis
What the desk is arguing
The desk posits that the combination of hawkish expectations from the Federal Reserve and heightened risk aversion is likely to sustain the dollar's strength in the near term. Per the full note source, the recent strong jobs report has bolstered market forecasts, leading to continued appetite for the dollar despite potential overvaluation risks in Fed tightening expectations.
Beyond the immediate impact of inflation data, we note that investors are also adjusting their portfolios in response to Fed signals, as seen in the tech sector's corrective moves which may influence broader market sentiment and USD positioning.
Where it sits in our coverage
Our internal consensus for EUR/USD stands at 1.1900 by December 2026, with a range of 1.1300 to 1.2000. Notable firm targets include ING at 1.2200 for December 2026 and Barclays at 1.2100, indicating a bullish sentiment aligned on the dollar's trajectory.
This perspective aligns with the broader market direction, as many firms are adjusting their forecasts in light of recent Fed communication and economic data, positioning the desk's view slightly above the central consensus.
How other firms see it
Several firms echo this bullish sentiment on the dollar, with Commerzbank and Goldman showing similar levels of confidence in future dollar strength. In contrast, a handful of firms like Citi are adopting a more cautious stance, with projections indicating potential weakening for the USD, viewing the current valuations may be nearing their peak.
As the Fed tightens, movements in USD/JPY could serve as an additional indicator of market sentiment towards the dollar, reflecting spillover effects from Fed decisions and risk-on/risk-off shifts in investor behavior.
Market Implications
Watch for the upcoming May inflation data on Wednesday, which could solidify or challenge current Fed tightening expectations. Additionally, observe how positioning in USD/JPY reacts to imminent Fed communications as this could impact broader market sentiment.
From the original
Articles FX Daily: Fed pricing and tech indigestion bolster dollar 07:48 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The dollar is enjoying broad support. Bearish flattening of the US yield curve as the market moves to price Fed tightening and
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