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.
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
Related speeches
4 itemsG10 FX Talking: Dollar stronger for longer
The desk expects sustained strength in the dollar, driven by higher US rates and a resilient labor market. Investors anticipate further Fed tightening as the economic landscape points to protracted inflationary pressures, which supports the dollar's recent gains. Per the full note [source], the EUR/USD pair may see downward pressure, with targets potentially reaching 1.13-1.14 this summer amid ongoing stagflation concerns. Our internal coverage reflects this outlook with targets aligned around these levels.
FX Daily: Dollar consolidates recent gains
The desk maintains a cautiously optimistic view on the dollar, anticipating that it will continue to find support on dips amid a backdrop of improved risk asset stability, particularly in the tech sector. Per the full note [source], the current environment is seen as conducive for the dollar, especially ahead of key US pricing data and monetary policy discussions. The upcoming CPI and PPI data releases will be critical in determining market sentiment towards the Federal Reserve's trajectory, particularly following last week's strong labor market indicators. Current positioning shows a consensus building around a more hawkish Fed, indicating potential dollar gains amidst potential for sustained risk asset consolidation.
FX Daily: Recovery in bonds and EUR/USD looking fragile
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 [source], the Bank of Canada is projected to maintain a measured approach despite a expected inflation rise, suggesting broader impacts on Canadian dollar valuations.
Global FX: EUR-USD divergences, systematic signals, sterling struggles
The FX desk is adopting a more bullish outlook on the dollar as diverging economic data strengthens the case for a stronger USD against the EUR. This shift comes on the heels of recent macroeconomic indicators that signal a slowdown in the Eurozone while the U.S. economy shows resilience. Consensus expectations remain generally supportive of the euro, but the disparity is stark as several firms adjust their projections closer to the desk's new view. Market participants should prepare for potential volatility as traders weigh whether to side with the bullish sentiment or bet against it.