Is the coast clear for further USD strength?
At a Glance
The desk posits a favorable outlook for the USD, with potential for further strength following the upcoming U.S. CPI report. Per the full note from MUFG EMEA, the market is cautiously optimistic that recent economic data will maintain the USD's upward momentum, particularly if the CPI exceeds expectations. This comes amid a backdrop of a likely Fed decision to keep rates on hold, with a delay in any further hikes until December 2026. Considerable attention will be on the CPI data due next week, as it will shape expectations for future monetary policy.
Key Takeaways
- 01The USD is poised for potential further strength driven by the upcoming U.S. CPI report.
- 02Recent economic data suggests the Fed may delay additional monetary tightening until December.
- 03An upside surprise in CPI could speak to renewed expectations for a rate hike, turbocharging dollar demand.
- 04Consensus targets reflect a mix of bullish and cautious outlooks among various financial institutions.
Full Analysis
What the desk is arguing
The desk supports the idea that the USD could continue its rally, especially with the anticipated U.S. CPI report for September serving as a potential catalyst. Recent data has given the Fed some room to pause on rate hikes, with softer readings such as the PCE deflator indicating moderating inflation pressures. This context aligns with MUFG's view that the dollar's strength might be sustained through the week ahead.
With expectations for the Fed to keep rates unchanged this month, the potential for a surprise upside in the CPI could quickly change market sentiment. An unexpected increase in the CPI could prompt discussions of a rate hike sooner than anticipated, reaffirming the bullish sentiment around the dollar and potentially driving it toward new highs.
Where it sits in our coverage
Currently, the consensus target for the USD is 1.075, with a range between 1.04 and 1.12. Key forecasts include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) The desk's expectation for continued USD strength aligns closely with jpmorgan's bullish target, positioning at the upper end of our tracked range. Conversely, bofa maintains a more cautious stance, anticipating a weaker USD.
How other firms see it
Several firms, including jpmorgan, view the potential for further USD strength as probable, while bofa diverges, forecasting a weaker dollar scenario. This contrast underscores varied interpretations of upcoming economic data.
The direction of the EUR/USD pair will likely reflect market reactions to the U.S. CPI data, given tight correlations between dollar strength and euro movements, especially in light of the ECB's own cautious rate stance.
Market Implications
Traders should focus on the upcoming U.S. CPI report scheduled for release next week, as it may catalyze market movements, especially if the results are stronger than expected. A significant move above the 1.075 level could see further bullish positioning in the USD.
From the original
Lee Hardman, Senior Currency Analyst, and Abdul-Ahad Lockhart, Currency Analyst, discuss the key data releases and events in the week ahead for the USD. Are short-term economic fundamentals aligned for further USD strength?
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4 itemsHow much further can the USD strengthen?
The USD looks set for further strength amid diverging monetary policies and ongoing political uncertainties in the UK, as articulated by MUFG analysts. Per the full note [source], the political turbulence in the UK has not significantly impacted the Pound or Gilts, suggesting that market participants may have already priced in a degree of instability. Additionally, the Fed's more hawkish stance compared to the Doves in Europe continues to support USD strength, evidenced by the recent uptick in US Treasury yields which signals confidence in a resilient economic trajectory amidst global uncertainties.
A pivotal week for the USD?
The desk believes that the upcoming week, marked by critical central bank meetings—including the Fed under new Chair Kevin Warsh—could be a pivotal moment for the USD. Per the full note from MUFG, positive economic data surprises in both activity and inflation are mounting pressure on the Fed to adopt a more hawkish stance, potentially leading to renewed strength in the dollar. While the market has begun pricing in more rate hikes, the outcome of the Fed meeting will be essential in determining the sustainability of this upward trend. Investors should remain alert to how the evolving landscape, including sentiments surrounding a potential US-Iran deal, might further influence the currency outlook.