FX Talking: Don’t call it a dollar comeback
At a Glance
Lead — The desk interprets the Fed's anticipated rate hike as a temporary support for the dollar, but emphasizes the view that structural dollar weakness will persist in the longer term. Per the full note published by ING, while a forthcoming Fed rate increase may provide a short-lived boost, broader economic and geopolitical factors are likely to undermine dollar strength in the months ahead. This duality in outlook suggests that traders should remain cautious about positioning too heavily on a sustained dollar rally.
Key Takeaways
- 01The upcoming Fed rate hike likely supports the dollar in the short term despite the expectation of longer-term weakness.
- 02Macroeconomic factors, including economic slowdown risks, continue to pressure the dollar's outlook.
- 03Bank assessments show divergence, with some supporting short-term strength while others forecast a rapid deterioration.
- 04Traders should be cautious about overextending positions anticipating sustained dollar rally.
Full Analysis
What the desk is arguing
The desk posits that the upcoming Fed rate hike, likely to occur later this month, could lend short-term support to the dollar, as highlighted in the ING commentary. This speculation comes on the back of increasing market rates, which historically correlate with dollar appreciation. However, the overarching view remains one of long-term dollar depreciation driven by ongoing macroeconomic imbalances and shifting global sentiment towards risk.
Supporting this stance, ING suggests that fundamental challenges such as a potentially slowing economy and persistent trade deficits could weigh on the dollar's performance over the longer horizon. This sentiment aligns with broader market expectations that favor continued loose policy globally, aside from the Fed's tightening measures.
The desk implicitly rejects the notion that a singular Fed action can reverse the dollar's longer-term trajectory. A prevailing alternative view would suggest the dollar might stage a more significant recovery if economic indicators point towards durable growth, which is not presently the consensus expectation.
Where it sits in our coverage
Our consensus target for the dollar against the euro is 1.075, with a range between 1.04 and 1.12. Specific targets from key firms include: - jpmorgan: 1.10 by Mar26 - bofa: 1.04 by Mar26
This aligns closely with views across the board, positioning our expectations near the higher end, reflecting the cautious optimism surrounding the Fed's immediate policy context, while recognizing broader bearish trends.
How other firms see it
In general, firms like jpmorgan show alignment with our view, supporting the notion of short-term dollar strength due to expected Fed actions. Contrarily, bofa presents a more pessimistic outlook, indicating potential for dollar weakness sooner than anticipated.
Indicators like the EUR/USD trajectory and shifting U.S. economic data will be paramount, as they reflect the complex interplay of domestic performance and international sentiment impacting dollar valuation.
What the calendar says
As there are no upcoming high-impact events on the calendar, attention will focus on scheduled macroeconomic data releases and how they affect trader sentiment and positioning in anticipation of the Fed's official stance. Investors should remain alert to these developments that could shift the dollar narrative.
Market Implications
Focus on the EUR/USD as a key barometer for dollar strength, particularly watching for volatility surrounding subsequent U.S. economic data releases that could shift the market dynamics. Also, bear in mind that a return to the 1.10 resistance level could signal adjustments in positioning ahead of the Fed’s decisions.
From the original
Reports Report FX Talking: Don’t call it a dollar comeback Published 11:05 FX A Fed hike later this month could support the dollar for now, but we still expect longer-term dollar weakness Chris Turner and Francesco Pesole Download PDF FX Talking Content Disclaimer This publicatio
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The desk's core view is that the recent Fed rate hike delay will support the dollar temporarily, particularly against lower-yielding currencies. This aligns with the belief that a 25bp increase is anticipated on September 16, which could stabilize the dollar in the short term despite downward adjustments to year-end forecasts for the euro and other currencies. Per the full note from ING, the outlook for EUR/USD has shifted to 1.16 from 1.18, reflecting the idea that a sustained decline in the dollar is now postponed until early next spring, when U.S. inflation is expected to align closer to the Federal Reserve's 2% target. With various pairs showing bearish sentiment towards the euro and bullish expectations for USD/JPY, attention is drawn to current positioning and potential market reactions leading up to the Fed decision.
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The desk interprets ING's latest FX forecast as signaling a potential upward trend for the dollar, particularly against the euro, amidst expectations of sustained Federal Reserve interest rates. Per the full note [source], the commentary emphasizes macroeconomic factors such as inflation persistence that could lead to a longer duration of elevated rates. This outlook is further supported by recent labor market data that indicates resilience. The anticipated trade balance improvement in Q4 may also bolster dollar strength, signaling traders should watch how positions evolve ahead of any significant economic data releases.