Will the USD continue to fall as the Fed moves closer to cutting rates?
At a Glance
The desk posits that the USD is likely to continue its downward trajectory as the Federal Reserve approaches a rate-cutting cycle, particularly in light of the recent weak nonfarm payrolls report. Per the full note from MUFG EMEA, the labor market data has raised concerns about the sustainability of the USD's strength, especially as political uncertainties in France and Japan may further exacerbate its decline. The Fed's pivot towards easing, coupled with soft economic indicators, suggests a bearish outlook for the greenback in the near term.
Key Takeaways
Full Analysis
What the desk is arguing
MUFG argues that the recent weak nonfarm payrolls report has brought the Fed closer to cutting rates, which should continue to weigh on the USD. The market is increasingly pricing in a September rate cut, and further labor market softening would reinforce this view.
Political uncertainty in France (snap elections) and Japan (potential intervention) could paradoxically support the USD by driving safe-haven demand. However, MUFG downplays this effect, noting that the broader trend of Fed easing dominates.
Where it sits in our coverage
Our consensus target for EUR/USD stands at 1.075 by year-end, with a firm spread of 1.04-1.12. MUFG's bearish USD view aligns with our medium-term outlook, though they are less focused on specific levels.
Specific firm targets include: - Barclays: 1.10 (Mar-26) - JPMorgan: 1.10 (Mar-26) - Goldman Sachs: 1.08 (Mar-26) - Morgan Stanley: 1.08 (Mar-26) - Citi: 1.12 (Mar-26) - BofA: 1.04 (Mar-26) - HSBC: 1.03 (Mar-26)
How other firms see it
Barclays, JPMorgan, and Goldman Sachs are aligned with MUFG's view that USD weakness will continue, with targets above 1.08 for EUR/USD. Citi is even more bullish EUR/USD, targeting 1.12.
BofA and HSBC are contrary, forecasting a stronger USD with targets at 1.04 and 1.03 respectively. They argue that rate cuts are already priced in and that safe-haven flows will support the dollar.
Market Implications
EUR/USD upside likely to persist, with potential test of 1.10 if Fed cuts in Sept. GBP/USD also benefits but may lag due to UK political uncertainty.
From the original
Lee Hardman, Senior Currency Analyst, speaks with Simon Mayes, Head of UK, Ireland and Switzerland Corporate Sales (FX), to discuss the outlook for the USD after the release of another weak nonfarm payrolls report. Will political uncertainty in France and Japan help to dampen USD
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The recent U.S. non-farm payrolls report, which significantly underperformed expectations, has shifted market sentiment towards anticipating a Federal Reserve rate cut in September. Per the full note from MUFG EMEA, this weaker labor data is prompting investors to reassess their positions, particularly regarding the U.S. dollar. The report showed only 150,000 jobs added in August, far below the 200,000 forecast, indicating potential economic slowing. This development has implications not only for Fed policy but also for U.S. trade tariffs and the Swiss franc's performance against the dollar.
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