FX Daily: Hot inflation to strengthen dollar floor
At a Glance
The desk believes that hot inflation numbers will create a stronger support level for the US dollar, particularly in light of expected higher month-on-month CPI readings. Per the full note , the macro team forecasts a 0.7% rise in headline CPI and a 0.3% increase in core CPI, both 0.1 percentage points above consensus. This suggests a re-strengthening of the dollar, which could recalibrate market expectations around an October Fed rate hike. Current moves in EUR/USD point to a retest of recent lows, creating potential trading opportunities as market sentiment shifts.
Key Takeaways
- 01US CPI data is expected to come in hotter than consensus, enhancing dollar support.
- 02The Euro is likely to retest recent lows against the dollar as tightening expectations solidify.
- 03Market sentiment is influenced by Fed officials' comments on future rate hikes.
- 04Divergence in currency forecasts reflects different positioning ahead of potential rate changes.
Full Analysis
What the desk is arguing
The desk posits that today's inflation data could robustly support the US dollar. The projections of 0.7% for headline and 0.3% for core CPI exceed market expectations, which may prevent a significant dovish recalibration of the Fed's front-end pricing. Per the source, the expectation is that while the potential for a rate hike in October remains limited, the tightening outlook may solidify the dollar.
Additionally, a recent dovish remark from Fed’s John Williams, indicating a slower pace of future inflation, seems to reinforce the desk's view. While he stated that he still expects one more rate hike this year, the language used has contributed to softer dollar positioning recently.
Where it sits in our coverage
Our current spot for EUR/USD is 1.1253, with consensus targets showing a median of 1.1600 (ranging from 1.1200 to 1.2000) for December 2026. Notable targets include: - Rabobank: Dec-26 at 1.1800 - Societe Generale: Dec-26 at 1.1400 - Mizuho: Dec-26 at 1.1600
This forecast aligns closely with our expectations around a moderate upward trajectory but rests at the lower end of the range set by others, particularly the more bullish forecasts from firms like CIBC and Nomura.
How other firms see it
A range of firms project potential strength in the dollar, including Rabobank and HSBC, while firms like ABN AMRO express more bearish sentiments in currency pairs such as the EUR/USD. The divergence in opinion reflects differing views on the timing and magnitude of Fed rate hikes.
Additionally, USD/JPY movements may offer insights into dollar strength relative to the yen, particularly in this environment where inflation figures will dictate broader market moves.
Market Implications
Watch for EUR/USD to potentially retest lower levels if today's CPI data indeed surprises to the upside. A move above 0.3% in core CPI could signal a shift toward pricing in a higher likelihood of an October Fed rate hike.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UBS | Bullish | 1.1600 |
ING | Bullish | 1.1300 |
Société Générale | Bearish | 1.1000 |
From the original
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