Fed likely to need to raise rates amid worsening inflation: Daly
Federal Reserve Bank of San Francisco President Mary Daly's recent comments highlight a significant shift in the policy outlook as she suggests a need for further rate increases to combat escalating inflation. This hawkish stance reinforces the dollar's current strength, indicating that financial markets may recalibrate their expectations regarding the Fed's interest rate trajectory. The comments also raise concerns over the possibility of a soft landing, with traders particularly focused on upcoming inflation data to gauge the validity of this perspective.
Where it sits in our coverage
Our consensus EUR/USD target sits at 1.075 (median across 8 firms), with Goldman at the upper bound (1.12) and BofA at the lower (1.04). Reuters' analysis aligns more closely with the upper third, as it affirms the potential for continued USD strength driven by Federal Reserve policy shifts.
How firms align
JPMorgan stands in alignment with the headline's perspective, maintaining a target of 1.10 for EUR/USD, which reflects an expectation of USD resilience amid tightening monetary policy. In contrast, BofA's target sits lower at 1.04, suggesting a more cautious approach towards the dollar's forward movement, as detailed in our internal /reports/jpmorgan and /reports/bofa pages.
What the data shows
Recent inflation metrics suggest persistent upward pressure, aligning with Daly's assertions. Traders should monitor changes closely, with more insights available in our /research/<slug> publication detailing the implications of inflation on FX dynamics.
How firms align with this view
Aligned with the headline view
Contrary positioning
Key takeaways
- 01Daly's comments signal a stronger case for further Fed rate hikes.
- 02Traders should focus on upcoming inflation data as a market driver.
- 03USD strength may persist if inflation continues to surprise to the upside.
Market implications
Investors should watch the 1.075 level in EUR/USD as crucial support, alongside the upcoming CPI data release next week that could further influence Fed policy expectations. Any upside surprises could bolster the dollar's position further.
Risks to this view
Any indication of easing inflation or dovish shifts in Fed rhetoric could invalidate this hawkish view, potentially leading to a sharp corrective move in USD strength. Pay attention to Fed speakers' comments for signals of a shift in tone.
Sentiment by currency
USD+EUR JPY GBPComposite USD score: +0.65
Sources & References
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