USD downside risk increasing
At a Glance
The desk is increasingly concerned about the downside risks to the US dollar, particularly in light of recent developments in monetary policy and trade. Per the full note from MUFG EMEA, the dollar has weakened modestly, slipping less than 1% this week, which may signal a broader trend as the market digests the implications of Stephen Miran's appointment to the Fed Board of Governors. This shift could potentially influence Chair Powell's stance ahead of the upcoming US CPI data release on August 12, which is critical for gauging inflationary pressures and subsequent Fed actions. The desk believes that these factors could lead to further dollar depreciation in the near term.
Key Takeaways
Full Analysis
What the desk is arguing
The risk profile for the dollar is skewing to the downside as recent trends indicate a modest yet persistent weakening. Given the significance of forthcoming CPI data and the implications of Stephen Miran's Fed appointment, market participants should brace for potential volatility that could further impact the dollar's valuation.
Supporting this bearish outlook, the dollar slipped less than 1% this week, signaling broader issues that may persist. Analysts are particularly noting the implications of tariffs implemented this past Thursday, which could dampen economic performance and provide further catalysts for dollar depreciation.
Where it sits in our coverage
Our current consensus target for the USD stands at 1.075, with a trading range anticipated between 1.04 and 1.12. This outlook is somewhat aligned with MUFG's recent analysis, which emphasizes growing concerns around the dollar's strength, particularly in light of external economic influences.
In contrast, other firms are setting varying targets for the upcoming months: - JPMorgan: 1.10 (Mar-26) - Bank of America: 1.04 (Mar-26) - Goldman Sachs: 1.08 (Dec-26) These perspectives illustrate a mix of cautious optimism and skepticism regarding the dollar's short-term resilience.
How other firms see it
Market sentiment is divided, with some firms echoing the bearish stance on the dollar. For instance, Citi expresses concerns around the Fed's tightening policy impacting the dollar's maintenance of value.
Conversely, other firms remain optimistic, positioning for a stronger dollar in the long run despite recent weaknesses. Notably, Nomura and Wells Fargo maintain forecasts aligning with a robust dollar outlook through early 2026. - Citi: bearish outlook - Nomura: bullish outlook - Wells Fargo: bullish outlook
Market Implications
Investors should be alert to the potential for increased volatility in currency markets, particularly in response to evolving economic indicators such as CPI data. A weakening dollar could encourage a shift in capital flows and influence broader market sentiment toward risk assets.
From the original
The dollar weakened again this week, though more modestly - slipping less than 1%. Derek Halpenny, Head of Research, Global Markets EMEA & International Securities, joins James Roulston from FX Institutional Sales to unpack the key themes likely to shape FX moves in the weeks ahe
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4 itemsTHINK Economic and Financial Analysis
The desk is focused on the trends emerging from recent economic indicators, particularly emphasizing the implications of the latest monetary policy signals. Per the full note [source], recent data indicates potential market shifts that could keep USD volatility in check over the coming weeks, with inflation metrics offering a key context. Current expectations suggest that the inflationary pressures are gradually easing, aligning with easing central bank stances on interest rates as observed in recent communications from the Federal Reserve. This broader economic landscape places the USD in a position to see relative strength against major currencies, reaffirming the consensus estimate for the coming months.
FX Daily: Hawkish Fed repricing propels USD higher
The desk sees the recent hawkish repricing of Fed expectations as a key driver for the USD's upward momentum. Per the full note from ing-think, strong US economic data has bolstered confidence in a potential Fed rate hike, while the EUR/USD short-term rate gap has widened to levels reminiscent of pre-war conditions. This backdrop suggests that the EUR/USD could test the 1.160 mark, reflecting a significant shift in market sentiment. Our consensus target for EUR/USD stands at 1.075, indicating a divergence from some market participants who remain cautious about the dollar's strength.
What’s next for the USD after setback at start of Trump’s second term?
The desk anticipates a bearish outlook for the USD following the Fed's policy update, which could catalyze further declines in the currency. Per the full note from MUFG EMEA, analysts Lee Hardman and James Roulston highlight that the market is bracing for a dovish shift from the Federal Reserve, potentially leading to a weaker dollar in the near term. This perspective is underscored by recent economic data indicating a slowdown in inflation, which may prompt the Fed to reconsider its tightening stance. With no high-impact events on the calendar in the next month, the focus will remain on the Fed's upcoming announcements and market reactions to them.
Dollar Will Struggle into Year-end: UBS - Pound Sterling Live
UBS expects the U.S. dollar to face significant headwinds as it approaches the end of the year. Factors contributing to this outlook include increasing market uncertainty and potential shifts in monetary policy that may deter dollar strength.
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