G10 FX Talking: The narrow path to a weaker dollar
At a Glance
The desk views a potential for the U.S. dollar to weaken, hinging on the Federal Reserve's decision to refrain from raising interest rates in September, if supported by softening U.S. CPI data. Per the full note, this dovish Fed stance could lead to modest bullish steepening in the U.S. yield curve and a weaker dollar against procyclical currencies like the euro. This outlook is predicated on market expectations, which suggest a less than 30% chance of a rate hike, thereby allowing the Fed to maintain control over long-dated Treasury yields. Consensus for EUR/USD points to a dual year-end target of 1.20, showing market readiness for a dollar decline in a risk-positive environment.
Key Takeaways
- 01Dollar weakness is anticipated if the Fed avoids hikes in September amid softer CPI data.
- 02Expectations of an ECB rate hike support the euro against the dollar.
- 03Current EUR/USD consensus targets range around 1.1700 for March 2026.
- 04Recent USD/JPY interventions introduce additional complexities for dollar forecasts.
Full Analysis
What the desk is arguing
The desk predicts a softer dollar if the Federal Reserve adopts a holding pattern during their upcoming meeting. This expectation is primarily driven by potential softer inflation readings for July and August, positioning traders to anticipate no increases from the Fed on September 16.
Key indicators such as U.S. CPI and the ECB's anticipated tightening, with predictions of a 2.50% rate in September, underpin this thesis. When the Fed opts for a pause, the resulting shift in the yield curve could catalyze a risk-positive environment, ideally supporting a benign decline for the dollar into year-end.
Where it sits in our coverage
With the current spot price for EUR/USD at 1.1466, our internal coverage consensus suggests a target of 1.1700 by March 2026, ranging between 1.1200 and 1.2000. Some notable targets from firms include: - deutschebank: 1.1800 (Mar26) - ubs: 1.2000 (Mar26) - bofa: 1.1700 (Mar26)
This dovish perspective aligns with deutschebank and ubs, sitting towards the higher end of the cross-firm forecast spread.
How other firms see it
In contrast, other firms like bofa and hsbc hold a more bearish viewpoint, anticipating lower targets for the euro against the dollar and indicating potential challenges for a dollar decline, reflective of differing inflation expectations between the U.S. and Eurozone.
The intersection of this analysis with the USD/JPY narrative is critical, particularly as recent joint interventions have highlighted volatility in Asia’s FX markets. Movement in this pair could reflect broader implications for dollar weakness dependent on Fed actions and other central banks' responses.
Market Implications
The key level to watch is the EUR/USD 1.1600 mark as this may indicate bullish momentum expected from a dovish Fed decision. Additionally, traders should monitor the market's reaction to inflation data leading up to the FOMC meeting on September 16, which could significantly influence dollar dynamics.
AUD/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Bank of America | Bullish | 0.7000 |
Westpac | Bullish | 0.7200 |
UOB | Bullish | 0.7075 |
From the original
Articles G10 FX Talking: The narrow path to a weaker dollar Published 12:15 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download It's a bold call, but we think the Fed will just about have enough supporting evidence to avoid hiking and avoid crashing th