Our latest views on the major central banks
At a Glance
The desk acknowledges the potential shift in monetary policy landscapes shaped by central bank communications, particularly from the Federal Reserve and the European Central Bank. Per the full note , recent statements from Fed Chair Kevin Warsh point towards a heightened likelihood of a rate hike, indicating a pivot from a previous stance of inaction to one of potential tightening. This is further underpinned by the ECB's resilience amid geopolitical tensions and its track record of advocating for rate hikes. As markets grapple with these shifting narratives, maintaining focus on FX pairs like EUR/USD, GBP/USD, and USD/JPY will be crucial as we anticipate a slow rate hike trajectory through the rest of 2026.
Key Takeaways
- 01Federal Reserve's likely rate hike is gaining traction in light of inflation data and current labor market conditions.
- 02European Central Bank shows surprising resilience, with both inflation and growth factors suggesting a rate hike is feasible soon.
- 03Market expectations are coalescing around the potential for rate increases from both the Fed and ECB in the near term.
- 04FX traders should prepare for volatility around upcoming rate announcements, particularly for EUR/USD and USD/JPY pairs.
Full Analysis
What the desk is arguing
The desk sees a pivotal moment ahead, with rate hikes likely from both the Federal Reserve and the ECB looming on the horizon. This sentiment is bolstered by increasing inflation pressures and a labor market showing resilience, particularly in the US where inflation expectations remain elevated despite some mixed economic indicators. Quoting specific sentiments from the source, the prevailing view now reflects a readiness to hike rates barring compelling data to support a pause.
Evidence in the form of Chair Warsh's comments, alongside ECB members' past advocacy for rate hikes, further solidifies this stance. With inflation exceeding desirable benchmarks and employment at full levels, conditions appear ripe for at least one more rate hike, likely at the September meetings for both the Fed and ECB.
Where it sits in our coverage
For the EUR/USD pair, our internal consensus stands at 1.1700, with forecasts ranging from 1.1200 to 1.2000 among firms. Key targets include RBC at 1.2000 and Morgan Stanley at 1.2000 for March 2026, suggesting that our call aligns with the upper spectrum of current expectations.
This perspective on potential rate hikes diverges slightly from the broader consensus which indicates a more cautious approach to hikes potentially being spaced out instead of a more aggressive monetary stance.
How other firms see it
Aligned with our view, firms like ING and RBC see the EUR/USD meeting targets that reflect an overarching belief in rate hike trajectories. Conversely, Nomura and Danish Bank reflect a more reserved forecast, projecting targets down towards the 1.1200-1.1866 range for March 2026.
A keen observation of how the USD/JPY might respond to these developments is warranted; as the Fed’s tightening becomes more pronounced, USD valuations could strengthen, propelling JPY considerations in turn, particularly under Bank of Japan stance adjustments.
Market Implications
Keep an eye on the EUR/USD as it tests crucial thresholds around 1.1700, particularly ahead of possible Fed and ECB decisions. A successful breach or failure around these levels could indicate broader market positioning ahead of September's pivotal meetings.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bearish | 1.1140 |
ABN AMRO | Bullish | 1.1500 |
Bank of America | Bullish | 1.1500 |
From the original
Articles Our latest views on the major central banks Published 11:41 United Kingdom Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Our take on what could be next for the Federal Reserve, the European Central Bank, the Bank of England and the Bank of
Related speeches
4 itemsWhat are the main takeaways for the FX market from this week's central bank updates?
The desk anticipates that the FX market will remain sensitive to central bank communications in light of recent updates from the Fed, BoJ, and BoE. Heightened uncertainty surrounding President Trump's policy plans is likely to influence these communications, as noted by Lee Hardman and Seiko Kataoka-Fisher in their analysis [source]. The Fed's cautious stance, coupled with the BoJ's ongoing accommodative policy, suggests a divergence in monetary policy that could impact currency valuations significantly. Currently, our consensus target for EUR/USD sits at 1.075, reflecting a balanced view amid these developments.
UBS On-Air: Paul Donovan Daily Audio 'Talk and taxes'
The desk highlights the focus on central banking narratives, particularly the Bank of Japan's minutes today, which may draw attention amid limited investor engagement elsewhere. Per the full note [source], the prevailing sentiment across global central banks offers little to alter current market stances, although UK fiscal policy is gaining traction due to speculation over potential tax increases. With UK Chancellor Reeves hinting at tightening measures, traders should be aware that sentiment could shift if the government unveils significant fiscal adjustments this month. This confluence of central bank events could enhance volatility, particularly in currency pairs sensitive to these dynamics.