FX Talking: Dollar downturn delayed
At a Glance
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.
Key Takeaways
- 01The dollar's downturn is postponed as Fed policy remains supportive.
- 02EUR/USD could approach 1.14; bearish outlooks dominate the G10.
- 03Emerging market currencies are facing headwinds, but resilient against the dollar.
- 04Potential shifts in the geopolitical landscape could further impact energy prices and inflation trends.
Full Analysis
What the desk is arguing
The desk emphasizes that the dollar's downtrend is likely postponed, driven by improving conditions in the Middle East and intensified tightening from the Fed. Per the full note, the dollar's resilience is supported by the labor market's strength and prevailing inflation rates, suggesting potential strength may extend into the third quarter.
Supporting this view, market expectations have shifted to favor Fed rate hikes, and the commentary hints at potential dips for the euro, sterling, and yen against the dollar. Trading levels for EUR/USD may approach 1.13-1.14 even in light of upcoming ECB rate hikes.
Where it sits in our coverage
Our current consensus target for EUR/USD is 1.1700, with a range of 1.1200 to 1.2000. Specific targets from major firms in our coverage for Dec-26 include: - deutschebank: 1.2500 - bofa: 1.2200 - mufg: 1.2400.
This view suggests a positioning at the lower bound of the spread as our target aligns closely with the bofa outlook but diverges from the more optimistic evaluations from firms like deutschebank and mufg.
How other firms see it
Aligned views mainly come from firms expecting similar levels of dollar strength, like cibc targeting 1.1866 for March 2026, while firms like uob diverge with less bullish targets, currently forecasting 1.1536 for the same period.
Notably, the trajectory of EUR/USD is closely tied to the actions of the Fed and the ECB, with the movements in USD/JPY also reflecting broader dollar strength dynamics.
Market Implications
Watch for EUR/USD approaching the crucial levels around 1.13-1.14; any Fed or ECB announcements could shift sentiment swiftly. Positioning signals and economic data from the US will be critical in shaping the dollar's trajectory.
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: Dollar downturn delayed 08:14 FX Talking Improving Middle East sentiment and hopes for resumed energy flows are lifting markets, but inflation remains entrenched. Fed tightening expectations are supporting the dollar, whose strength could extend into th
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