FX Daily: Recovery in bonds and EUR/USD looking fragile
At a Glance
The desk is cautious on EUR/USD and USD/JPY as the dollar shows resilience amid geopolitical uncertainties, particularly pertaining to the Middle East. As highlighted in the recent commentary, a lack of progress on peace talks could see the dollar claw back strength, sending EUR/USD towards a 1.160 retest and USD/JPY towards 160. These price levels reflect market anticipation for U.S. dollar strength, notwithstanding the absence of immediate military escalation. Per the full note , the Bank of Canada is projected to maintain a measured approach despite a expected inflation rise, suggesting broader impacts on Canadian dollar valuations.
Key Takeaways
- 01Market sentiment remains fragile amid geopolitical tensions, impacting dollar strength.
- 02A lack of progress on Middle East headlines may push EUR/USD to retest 1.160 and USD/JPY to 160.0.
- 03The Bank of Canada is not expected to adopt a more hawkish stance despite inflation rises.
Full Analysis
What the desk is arguing
The desk views the recent strength of the dollar as potentially transient unless geopolitical developments provide significant clarity. The risk is that unresolved tensions will reinforce dollar buying, particularly if sentiment falters in the absence of positive headlines. This reflects a broader market sentiment that a retest of levels around 1.160 in EUR/USD and 160.0 in USD/JPY is plausible in the near term.
Current spot levels for EUR/USD stand at 1.1500, which, if breached by increasing dollar momentum, could lead to swift declines towards 1.160. Meanwhile, USD/JPY is presently at 157.0000, poised for potential upside as market positioning remains supportive of further dollar appreciation.
Where it sits in our coverage
Our current consensus places the EUR/USD target at 1.1700 with a range of 1.1300 to 1.2000, reflecting a divergence in expectations among different firms. Notable targets for December 2026 include: - jpmorgan: 1.2000 - goldman: 1.2500 - mufg: 1.2400
This suggests a relatively bullish outlook among certain firms, positioning the desk's near-term caution at the lower end of the existing targets.
How other firms see it
Firms such as morganstanley and bofa are in alignment with a bearish stance on the dollar, presenting more conservative targets for EUR/USD and USD/JPY. In contrast, deutschebank and goldman maintain higher projections for the euro, indicating confidence in a recovery.
Understanding the implications of the BoC's inflation expectations is critical, as inflation trends will affect CAD valuations, which are inversely correlated to USD positions in certain environments, impacting the broader currency landscape.
Market Implications
Traders should closely monitor the 1.160 and 160.0 levels for EUR/USD and USD/JPY, respectively. Market positioning around these levels will be telling as geopolitical developments unfold, particularly with no upcoming high-impact events on the horizon for the next 30 days.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
BNP Paribas | Bearish | 1.1500 |
UBS | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
From the original
Markets are awaiting the next cue from Middle East headlines. Failure to show progress can prompt the dollar to return to Friday’s strong levels even without a military escalation. We could see a retest of 1.160 in EUR/USD and 160.0 in USD/JPY soon. In Canada, a well-telegraphed
Related speeches
4 itemsFX Talking: Dollar downturn delayed
The desk maintains a relatively bullish view on the dollar's strength as improvements in Middle East sentiment and sustained Fed tightening expectations suggest a delayed downturn for the greenback. As highlighted in the source commentary, the Fed's anticipated policy adjustments are likely to sustain this strength into the third quarter, with inflation remaining a persistent challenge. Given the current inflation rate exceeding 4% and robust employment data, the prospect of a dollar decline appears postponed until 2027, leading to projections for EUR/USD to potentially dip to the 1.13-1.14 level. However, the consensus remains divided, with different outlooks for major pairs like USD/JPY and EUR/USD potentially influenced by upcoming ECB and Fed decisions.
FX Daily: Dollar caught between many fronts
The desk's thesis positions the dollar as resilient amid various market pressures, particularly from the bond market and escalating trade tensions, notably with Canada. Per the full note [source], the dollar is currently buoyed by a supportive bond market, with a significant focus on U.S. consumer confidence data and trade relations impacting CAD. While the dollar shows strength against key pairs like AUD and CAD, it remains susceptible to geopolitical tensions, especially relating to sanctions on Iran and ongoing U.S.-China trade dynamics. Current consensus suggests USD/CAD could push beyond 1.390, mirroring broader expectations of dollar strength against developed currencies.