FX Daily: Pre-FOMC positioning may favour the dollar
At a Glance
The desk sees potential for dollar strength leading up to the FOMC meeting, as market participants position themselves for any hawkish surprises. Per the full note from ing-think, there is apprehension regarding forward guidance from Chair Kevin Warsh, indicating that traders might favor holding dollars as a hedge. With the recent drop in oil prices providing some support to EUR/USD, the overall sentiment is still cautious, primarily if geopolitical tensions do not ease further. Importantly, the upcoming GDP data will likely influence dollar positioning further, with current market pricing indicating only minor adjustments—8bp for Wednesday and a cumulative 41bp by year-end.
Key Takeaways
- 01The dollar is likely to see strong positioning ahead of the FOMC meeting, driven by geopolitical tensions and the Fed's policy outlook.
- 02Chair Warsh's skepticism regarding forward guidance raises the potential for market surprise, encouraging dollar buying as a precaution.
- 03Oil prices are fluctuating but currently support the euro; however, any increase could negatively impact EUR/USD.
- 04Consensus forecasts indicate a cautious outlook for the euro against potential dollar strength.
Full Analysis
What the desk is arguing
The desk frames this as a potential bullish signal for the dollar amid pre-FOMC positioning. Recent geopolitical tensions, combined with Chair Warsh's skepticism about forward guidance, strengthen the case for precautionary dollar buying, especially against a backdrop of rising oil prices, which could pose downside risks to EUR/USD if they rebound swiftly.
Moreover, the dollar's current momentum is driven by a fragile pause in Middle Eastern conflicts and a significant reduction in Brent crude prices, now hovering around $92 per barrel. This shift reflects a market view that still sees the Fed's hawkish undertones playing a pivotal role in shaping monetary policy amid heightened market uncertainty.
Where it sits in our coverage
Our consensus target for EUR is currently 1.1419, with a median target of 1.1525 spanning forecasts from firms like goldman (Dec-26 target: 1.1200), bofa (Dec-26 target: 1.1240), and deutschebank (Dec-26 target: 1.2500).
This view aligns with the consensus that sees potential for dollar strength, particularly positioned lower than the median target. The overall sentiment could be considered bearish for EUR as the dollar gains traction.
How other firms see it
Several firms, including nomura and financialfirm, align with the desk's outlook, indicating they expect a strong dollar trajectory against the backdrop of the Fed's decision. Meanwhile, rabobank and bofa present more cautious perspectives, suggesting they see less upward momentum for the dollar compared to the existing consensus.
Keep an eye on related pairs such as EUR/USD and GBP/USD, as their movements will likely reflect sentiment surrounding the Fed's policy outlook and geopolitical tensions
What the calendar says
With no high-impact events scheduled in the next 30 days, market participants will remain focused on the outcomes of the Fed meeting this week, particularly the GDP data release on Thursday that may revise the growth narrative and influence dollar positioning.
Market Implications
Market participants should monitor the EUR/USD level around 1.1371 as positioning ahead of the Fed may lead to fluctuations. The impending GDP report on Thursday could serve as a catalyst for shifts in dollar strength, potentially affecting positions in EUR and GBP.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Bank of America | Bearish | 1.1200 |
ANZ | Bearish | 1.1400 |
UOB | Bullish | 1.1565 |
From the original
Articles FX Daily: Pre-FOMC positioning may favour the dollar Published 07:42 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The Fed should keep rates on hold on Wednesday, but Chair Kevin Warsh’s opposition to forward guidance may encourage
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