FX Daily: Hawkish Fed repricing propels USD higher
At a Glance
The desk sees the recent hawkish repricing of Fed expectations as a key driver for the USD's upward momentum. Per the full note from ing-think, strong US economic data has bolstered confidence in a potential Fed rate hike, while the EUR/USD short-term rate gap has widened to levels reminiscent of pre-war conditions. This backdrop suggests that the EUR/USD could test the 1.160 mark, reflecting a significant shift in market sentiment. Our consensus target for EUR/USD stands at 1.075, indicating a divergence from some market participants who remain cautious about the dollar's strength.
Key Takeaways
Full Analysis
What the desk is arguing
The desk believes that the resurgent hawkish outlook from the Fed is set to underpin the USD against the EUR, with the EUR/USD pair potentially testing toward the 1.160 level. Solid U.S. economic data is fueling this perception, resulting in a widening interest rate differential that may bolster the dollar's position against the euro.
While currency pairs often react to geopolitical influences, the desk posits that fluctuations driven by the Fed's imminent policy adjustments will outweigh any temporary sentiment shifts generated by international developments, particularly from China. This reinforces a bearish view on EUR/USD as the pair struggles to maintain footing amidst diverging rate paths between the Fed and the ECB.
Market Implications
As market dynamics shift with a stronger dollar, investors may need to reassess their positions in the EUR/USD pair. If economic data continues to favor a hawkish Fed stance, we could see a marked decrease in the euro's strength, prompting traders to capitalize on potential downside momentum.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bearish | 1.1140 |
ABN AMRO | Bullish | 1.1500 |
Bank of America | Bullish | 1.1500 |
From the original
Markets didn’t hear enough from Beijing to turn more optimistic on the Gulf, and hot US data is now feeding into greater confidence about a Fed hike. The EUR/USD short-term rate gap has rewidened close to pre-war levels, and the pair is looking at potentially testing 1.160. Some
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The desk maintains a bullish view on the dollar's resilience, driven predominantly by hawkish signals from the Federal Reserve amidst falling oil prices. Per the full note from ing-think, this environment suggests limited downside for USD, especially against the EUR as market participants remain anchored to Fed hike expectations. Recent labor market data supports expectations for a strong payroll print, further solidifying the dollar's strength. Our current consensus for EUR/USD sits at 1.1684, indicating a cautious outlook on eurozone monetary policy amid these developments.
FX: Cyclical dollar bullishness takes over
The desk is adopting a bullish stance on the US dollar, aligned with emerging cyclical factors suggesting a rally. Per the full note from ing-think, investor sentiment has shifted significantly from fears of a structural dollar decline to anticipation of a cyclical rebound, in part due to a prolonged period of tighter US monetary policy. Current data highlights that European buy-side hedge ratios for the dollar have returned to under-hedged positions at around 68%, underscoring confidence in holding dollar-denominated assets. Meanwhile, the consensus target for EUR/USD currently sits at 1.1717, with projections pointing to a gradual ascent towards 1.2000 by year-end. This context underscores the pivotal role of evolving US monetary dynamics, particularly as recent forecasts suggest no immediate high-impact events ahead that might disrupt this trajectory.