G10 FX Talking: Dollar comeback can last a bit longer
At a Glance
The desk sees the recent buoyancy of the US dollar persisting in the near term, driven primarily by strong inflation readings in the US which may challenge equity markets and ultimately influence euro trades. Per the full note from ING, the potential for a relaunch in EUR/USD relief rallies appears limited until geopolitical negotiations, such as a US-Iran deal, materialize. The ongoing political uncertainties in the UK also threaten to keep the pound under pressure, suggesting a cautious sentiment across G10 currencies amid broader market dynamics.
Key Takeaways
- 01The US dollar may maintain strength due to persistent inflation impacting risk sentiment.
- 02A potential relief rally in EUR/USD is contingent upon developments in US-Iran negotiations.
- 03Political uncertainty in the UK continues to pressure the pound, complicating G10 currency dynamics.
- 04Current forecasts show notable divergence in EUR/USD targets, reflecting varying firm sentiments.
Full Analysis
What the desk is arguing
The desk anticipates a prolonged dollar strength fueled by persistently high US inflation, which could curb the anticipated rally in the EUR/USD pair until significant geopolitical developments unfold. As noted in the ING commentary, the dollar's fortitude may come at the expense of European growth prospects as markets react to inflation data.
This situation is compounded by the shifting political landscape in the UK, which continues to weigh heavily on the pound. The current spot for EUR/USD at 1.1500 is notably below several consensus forecasts, which positions this pair for a potential rebound if a US-Iran deal takes shape.
Where it sits in our coverage
Our internal consensus target for EUR/USD is 1.2000 by December 2026, with a range from 1.1300 to 1.2000. Notable firm targets include: - jpmorgan: Mar26 1.1800, Jun26 1.2000, Dec26 1.2000 - goldman: Mar26 1.1800, Jun26 1.2100, Dec26 1.2500 - ing: Mar26 1.1900, Jun26 1.2000, Dec26 1.2200
The desk's outlook is slightly above the consensus median but aligns closely with ING, which forecasts a Mar26 target of 1.1900, indicating a common belief in some level of recovery in the euro.
How other firms see it
A number of firms, including morganstanley and deutschebank, are aligned with our view, projecting EUR/USD targets that anticipate a rebound, reflecting optimism about a corrective rally. Conversely, citi stands at the lower end of forecasts, indicating a more pessimistic outlook for euro appreciation relative to dollar strength.
Key indicators to watch include the ongoing trajectory of US inflation metrics and the evolving geopolitical situation concerning the EU and Middle East interactions, which are likely to impact market sentiment significantly.
Market Implications
Traders should closely monitor EUR/USD levels around 1.1500 and potential shifts in US inflation data, which could dictate short-term price movements. The upcoming geopolitical developments are also critical in sustaining or reversing dollar strength against the euro.
From the original
EUROPE: Hot US inflation can keep offering the dollar some support and test buoyant equity markets in the short term. That can lower the starting level for a relief rally in EUR/USD if and when a US-Iran deal is reached. Elsewhere, the pound will keep being tested by political ri
Related speeches
4 itemsFX Daily: Iran fall-out coming home to roost in EUR/USD
The desk sees the recent geopolitical tensions stemming from Iran as negatively impacting the euro against the US dollar, specifically projecting an imminent pullback in EUR/USD. They highlight a potential decrease in risk appetite among investors, which has historically led to dollar strengthening, particularly in uncertain market conditions. Per the full note from ING, the current price of EUR/USD at 1.1500 suggests that the pair is trading below many forecasts, representing a gap that may need to close as sentiment shifts. Given the absence of high-impact economic events for the next month, traders are likely to react to shifts in market sentiment around geopolitical developments.
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.
MUFG: Dollar set to extend gains as Warsh Fed signals hawkish shift on inflation
The desk believes that the US dollar will continue its upward trajectory, supported by recent hawkish signals from the Federal Reserve and stronger-than-expected inflation data. Per the full note from MUFG, the dollar surged 1.4% last week, its most significant gain since the onset of the Iran conflict, driven by elevated CPI and PPI numbers and rising yields. The market is adjusting to the leadership transition at the Fed, with Kevin Warsh's upcoming remarks anticipated to play a crucial role in shaping expectations around future rate hikes, reinforcing the dollar's strength against potential market headwinds.
FX Daily: Iran fall-out coming home to roost in EUR/USD
The EUR/USD pair faces downward pressure as stagflationary headwinds from geopolitical tensions in Iran increasingly weigh on European economic prospects. Per the full note from ing-think, the detrimental effects of rising inflation, coupled with stagnant growth reflected in recent European PMI data, suggest a shift in market sentiment regarding the ECB's monetary policy stance. As economic indicators hint at potential dovish adjustments from the ECB, consensus pricing may adjust downwards. Our recent analysis highlights the divergence in consensus targets, with several banks expecting the EUR to trade near 1.20 by the end of 2026, while current spot is notably lower at 1.1500.
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