FX Daily: Risks skewed to a stronger dollar
At a Glance
The desk believes the risks are increasingly skewed towards a stronger dollar, especially in light of Kevin Warsh's recent hawkish comments. His emphasis on persistent inflation and a robust economy suggests that the Federal Reserve is likely to maintain or even accelerate its tightening cycle. Per the full note , this sentiment is reinforced by rising energy prices, which create additional dollar demand amidst expectations of a potential rate hike by the Fed as soon as September.
Key Takeaways
- 01Recent comments from Fed officials signal increased likelihood of rate hikes, supporting a stronger dollar outlook.
- 02Rising energy prices add inflationary pressures, enhancing dollar demand.
- 03Consensus on USD/CHF indicates potential upswings, with our target at 0.8000 reflective of a bullish stance.
- 04Contrasting opinions exist among firms, with a divergence in dollar strength forecasts.
Full Analysis
What the desk is arguing
The desk's outlook centers on a stronger dollar trajectory, primarily driven by recent hawkish signals from Fed officials and newfound strength in energy prices. This aligns with the broader narrative that despite concerns about fiscal consolidation, the Fed will likely proceed with further rate hikes, particularly after the Beige Book release and discussions with Fed officials like Christopher Waller.
Critically, the market dynamics are throwing the spotlight on low-yielding currencies such as the Swiss franc, which is expected to underperform relative to the dollar due to its zero-bound policy. A dollar advance is particularly anticipated against USD/CHF given that Swiss interest rates remain firmly anchored.
Where it sits in our coverage
Currently, our consensus target for USD/CHF stands at 0.8000, with a range extending from 0.7600 to 0.8200. Some specific firm targets include: - commerzbank: March 26 at 0.7810 - goldman: March 26 at 0.8000 - ucb: March 26 at 0.7900
This bullish call for the dollar is consistent with the broader market view, as our targets suggest a modest upside even within the tight ranges observed across firms, some of whom are similarly positioned, while others set more conservative targets. Notably, scotiabank and citi stand at the higher range, further lending credence to a potential dollar appreciation.
How other firms see it
Aligning firms generally reflect a bullish sentiment on the dollar, suggesting they see merit in the stronger dollar view outlined by our desk. For instance, both goldman and hsbc are positioned similarly with their respective targets supporting a stronger dollar outlook.
Conversely, firms like barclays and citi are somewhat contradictory with their more cautious outlooks on dollar strength, hinting at potential vulnerabilities in their forecasts. Additionally, the USD/JPY currency pair also sits closely related to this analysis given the implications of U.S. monetary policy divergences versus Japan's steady low interest environment.
Market Implications
Traders should monitor USD/CHF as it shows promise for continued strength, particularly as economic data and statements from the Fed unfold. A decisive move above current levels could reinforce upward momentum, making it a pivotal pair for those aiming to capitalize on the dollar's strengthening.
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
Articles FX Daily: Risks skewed to a stronger dollar Published 07:45 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The dollar has taken note of Kevin Warsh's hawkish speech last Friday and looks to be holding onto gains. The renewed spike in ener
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4 itemsFX Daily: Kevin Warsh holds the keys to dollar resilience
The desk underscores that the resilience of the dollar is currently tethered to market expectations regarding Federal Reserve monetary policy, particularly in the wake of the new Chair Kevin Warsh's first meeting. Per the full note from ing-think, while the dollar has shown some strength, risks are increasingly tilted to the downside should the Fed's messaging diverge from prevailing market expectations. The influential role of the Fed's communication becomes crucial, especially with market anticipations pricing in a mere 21bps of tightening by December, considering both the recent dovish sentiment and the implications of the US-Iran deal that places further downward pressure on energy prices.
Kevin Warsh navigates a hawkish Fed shift
The desk posits that the changing tone from the Federal Reserve, now led by Kevin Warsh, signals a potential shift toward future rate hikes amidst growing economic momentum and inflationary pressures. As outlined in the source commentary, the Fed Chair seems disinclined to provide explicit forward guidance, which creates uncertainty in market pricing for rate adjustments. The consensus for rate hikes has intensified, with a 25bp increase already priced in for this year, as inflation rates are reported at a three-year high of 4.2%. Per the full note [source], this evolving landscape offers a complex, albeit hawkish, backdrop for major currency pairs like EUR/USD and USD/JPY going into the latter half of the year.