FX Daily: Staring at the geopolitical headlights
At a Glance
The desk believes that despite recent geopolitical tensions, notably in the Gulf and evolving dynamics in the Russia-Ukraine conflict, the dollar is poised for support due to resilient domestic growth and elevated energy prices. Per the full note, the desk notes a significant disconnect between current dollar strength and robust economic indicators such as the above-consensus August NFP reading alongside persistent high energy costs. With the Friday CPI data anticipated to reaffirm the Fed's stance ahead of the September rate decision, the dollar's trajectory may establish more clarity. Moreover, the upcoming Treasury auctions will provide further context on market sentiment in the bond space.
Key Takeaways
- 01The dollar remains supported despite geopolitical tensions impacting market sentiment.
- 02Upcoming U.S. CPI data is crucial for shaping Fed expectations and dollar trajectories.
- 03A significant inverse correlation exists between dollar strength and global equity performance.
- 04Projected targets for EUR/USD indicate a potential bullish sentiment among several major banks.
Full Analysis
What the desk is arguing
The desk frames this as a critical juncture where the dollar should exhibit more strength, given robust economic indicators such as high energy prices and favorable employment reports. However, the prevailing sentiment in equity markets may be suppressing demand for the dollar, shifting risk appetite towards equities instead. This perspective is bolstered by the negative correlation seen between dollar movements and global equity trends.
In particular, the upcoming monthly U.S. CPI release should provide key insight, where expectations of 0.4% and 0.2% month-on-month growth for headline and core inflation, respectively, could fortify the Fed's decision to increase rates by 25 basis points on September 16. Such a tightening signal could bolster the dollar further, potentially challenging current resistance levels.
Where it sits in our coverage
The current consensus target for EUR/USD aligns with a median of 1.1700, ranging from 1.1200 to 1.2000, with firms like morganstanley (Dec-26 target at 1.2150) and rbc (1.2000) projecting higher outlooks. Notably, ains also forecasts a similar target range for EUR/USD.
The desk's outlook diverges from consensus as their initial targets tend towards the middle of the predicted range, highlighting potential for a stronger bullish sentiment. Current positioning may indicate skepticism around the dollar's ascent amid wider equity performance across markets.
How other firms see it
Several firms are echoing similar bullish sentiments towards the dollar, with morganstanley and rbc projecting targets that align closely with the desk's views, while firms like nomura have a more cautious approach, forecasting only modest appreciation in the USD pairs. Such contrasting views suggest an interesting divergence in market sentiment.
Looking ahead, it is prudent to monitor the USD/JPY dynamics as any shifts towards a more accelerated tightening from the Bank of Japan could provide volatility in cross-currency impacts, particularly as global macro accounts reassess their risk exposure. Understanding these correlations will be essential in navigating the evolving landscape ahead.
Market Implications
Watch the USD/JPY level around 155 as it may indicate key macro account positioning shifts. Additionally, upcoming CPI data will be pivotal in determining future Fed actions.
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: Staring at the geopolitical headlights Published 07:40 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download FX markets are steady as they absorb the latest geopolitical developments. These include renewed escalation in the Gulf, possi
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