G10 FX Talking: Dollar stronger for longer
At a Glance
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.
Key Takeaways
- 01Sustained dollar strength expected amid higher US rates and inflation pressures.
- 02EUR/USD is projected to decline towards 1.13 by July, influenced by stagflation concerns.
- 03Internal consensus targets considerable higher than current forecasts suggest risk of overshooting expectations.
- 04A robust labor market underpins delayed Fed easing, potentially affecting global FX dynamics.
Full Analysis
What the desk is arguing
The desk argues that the dollar's strength will persist as recent economic data encourages the Fed to maintain or raise interest rates. With inflation running above the Fed's target of 2%, this environment will likely require a delay in any easing policy until 2027. Per the full note source, the anticipated 2023 summer could witness a renewed demand for the dollar as the bullish outlook for energy prices adds inflationary stress to the economy.
This view aligns with expectations that the European Central Bank may only be able to match the Fed's tightening pace with a hike during either July or September, which leans bearish on the euro. Notably, the desk predicts EUR/USD could slump to as low as 1.13 amidst these dynamics.
Where it sits in our coverage
Our consensus target for EUR/USD currently sits at 1.20 by December 2026, with forecasts from firms suggesting varying paths: - bofa: 1.2200, - goldman: 1.2500, - deutschebank: 1.2500.
This positioning suggests a divergence from the desk's mildly bearish stance, particularly as their targets are significantly lower than the average levels projected by leading firms in our coverage, with the desk's expectations of 1.13 in July indicating a more pessimistic view than others.
How other firms see it
Aligned with our expectations, firms like ing forecast EUR/USD targets at 1.1700 and 1.1800 for March and June 2026, respectively, echoing the cautious sentiment surrounding the euro. Conversely, companies like citi are positioning for a downward trajectory, projecting a lower target at 1.1100.
The overall outlook remains tethered to central bank actions and the evolving inflation narrative, particularly how this compares to other pairs such as GBP/USD and AUD/USD, which are facing their own respective pressures from local monetary policies.
Market Implications
Traders should monitor the EUR/USD closely, particularly for movement towards 1.13-1.14, as this aligns with the desk's outlook on broader dollar strength. Given absent high-impact calendar events, market sentiment and positioning shifts may dictate volatility in the near term.
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