FX Talking: Dancing in the dark
At a Glance
The desk’s outlook suggests dampened enthusiasm for the dollar amid expectations that the Federal Reserve may adopt a more lenient approach to temporary inflation pressures, limiting the currency's upward trajectory. As communicated in the recent commentary by ing, this perspective lays the groundwork for a strengthening EUR/USD later in the year, particularly as the Fed appraises its policy stance. Current indications point to a stable EUR/USD at 1.1434, which is significantly below the consensus target of 1.1750 for December 2026, underscoring potential upside for the euro.
Key Takeaways
- 01The Fed is expected to overlook temporary inflation, curtailing another rate hike.
- 02The EUR/USD pair is projected to recover, with consensus targets averaging around 1.1750 by December 2026.
- 03Current positioning hints at a weaker dollar and stronger demand for activity-linked currencies.
- 04Despite the dollar's recent strength, long-term forecasts favor euro resilience.
Full Analysis
What the desk is arguing
The desk argues that the dollar's rally, powered by Fed-induced gains, is likely to fizzle as the central bank turns a blind eye to transient inflation, maintaining a supportive climate for the euro. Per the full note by ing, further tightening is expected to be avoided, which should help uplift EUR/USD later this year.
Supporting the desk's view is the current positioning and sentiment around the dollar, alongside a consensus that projects the EUR/USD to trend upwards, where banks are anticipating a target around 1.1750 by December 2026. Given that inflation pressures are temporary, the outlook for the dollar's performance could be curbed.
The alternative read would be that if persistent inflation were to emerge, it could provoke unanticipated tightening from the Fed, thereby bolstering the dollar beyond current expectations, but this scenario seems less likely in the near term.
Market Implications
Traders should monitor the EUR/USD for potential breaks above current levels, particularly eyeing movements toward the consensus target of 1.1750. Additionally, shifts in Fed policy or unexpected inflation data could directly impact dollar valuations.
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
Reports Report FX Talking: Dancing in the dark Published 13:00 FX The dollar is holding onto Fed-driven gains, but we expect the central bank to look through temporary inflation and avoid further tightening. That should limit the dollar's upside and support EUR/USD later this yea
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