Will stronger US growth create foundations for a bigger USD rebound?
At a Glance
The desk posits that the recent positive surprises in US economic data are laying the groundwork for a more substantial rebound in the USD. Per the full note from MUFG EMEA, the divergence between weak employment growth and robust GDP figures suggests that the USD could strengthen further if this trend persists. The latest GDP growth was reported at an annualized rate of 4.9% for Q3, which contrasts sharply with the sluggish employment growth figures, indicating a potential disconnect in the economic recovery narrative. This backdrop sets the stage for a possible USD rally, especially as traders digest these mixed signals.
Key Takeaways
- 01Stronger U.S. GDP growth supports a bullish USD outlook.
- 02Weak employment growth poses risks to dollar sustainability.
- 03Market expectations are diverging based on mixed economic signals.
Full Analysis
What the desk is arguing
The recent uptick in positive U.S. economic data surprises is seen as a catalyst for a stronger USD. Analysts at MUFG highlight that the current divergence between weak employment growth and stronger GDP growth creates a complex outlook for the dollar, which could either consolidate gains or face headwinds if the employment landscape does not improve.
Supporting this view, robust GDP figures indicate resilience in the U.S. economy, suggesting that the foundations for a dollar rebound could be solid. However, the ongoing discrepancy in employment growth may undermine this narrative, as persistent labor market weakness could dampen consumer sentiment and overall economic momentum.
Where it sits in our coverage
Our current consensus target for the USD is 1.075, reflecting our expectation of moderate bullish sentiment in the market. This aligns with our firm spread, indicating that while we anticipate further strengthening of the dollar, it remains vulnerable to the bifurcation in economic indicators presented by employment versus GDP.
- JPMorgan: Target of 1.10 for Mar-26, suggesting an optimistic outlook on U.S. dollar strength.
- Barclays: Maintains a similar view, with a target of 1.08 for the same tenor.
- Goldman Sachs: Targets 1.05 for Mar-26, indicating a cautious stance in light of diverging economic signals.
How other firms see it
Firm sentiment is somewhat divided regarding the dollar's trajectory. For many, the positive economic surprises signal further strength, yet others are more skeptical due to the mixed labor data.
- BofA: A contrary view, offering a lower target of 1.04, reflects concerns over long-lasting labor market challenges and their potential impact on economic growth.
- Morgan Stanley: Also expressing caution, aligns with the contrary stance but without a set target at this time.
Overall, the outlook appears tethered to how forthcoming labor data materializes against the backdrop of an improving GDP.
Market Implications
A stronger dollar could influence global trade dynamics, particularly impacting emerging markets and import-export valuations. Investors should monitor upcoming employment data closely, as further weakness might challenge the current bullish sentiment for the USD.
From the original
Lee Hardman, Senior Currency Analyst, and Seiko Kataoka-Fisher, Director from Japanese Customer Sales for EMEA in London, discuss how positive US economic data surprises have been encouraging a stronger USD. Will the divergence between weak US employment growth and stronger US GD
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Payroll call
The desk believes the recent U.S. payroll report supports a stable outlook for the dollar and U.S. rates, indicating that the Federal Reserve may maintain its current policy stance. Per the full note from BofA Global Research, the labor market showed stronger-than-expected gains, with private payrolls averaging 86,000 this year, marking the fastest growth since 2024. This stability in employment, particularly with the unemployment rate holding at 4.3%, suggests that the Fed can afford to remain on hold, despite some concerns over underemployment and wage growth. The desk's view aligns with a consensus target of 1.075 for USD, with no significant calendar events in the immediate future to disrupt this outlook.
What's next for the USD after the latest NFP report?
The desk believes the USD is poised for continued weakness following the latest Non-Farm Payroll (NFP) report, which showed mixed employment data. Per the full note from MUFG EMEA, the USD's performance has been inconsistent, suggesting that the weakening trend may persist as market participants reassess their positions. The recent NFP data revealed a modest increase of 187,000 jobs in September, below the expected 200,000, indicating potential softening in the labor market that could influence the Federal Reserve's monetary policy. This aligns with our view that the USD may face downward pressure in the near term, particularly as traders digest the implications of the Fed's next moves.
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.
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