Fed's Hammack warns inflation expectations deterioration could require Fed response
Federal Reserve official Susan Hammack's warning regarding potential deterioration in inflation expectations has prompted discussions about the need for a Fed response. This concern stems from the delicate balancing act the central bank faces in maintaining price stability while avoiding market overshooting. The dollar could react to heightened uncertainties over future policy changes, particularly if inflation sentiment continues to slide, which would entail risk management adjustments across desks and possibly influence market positions amid a broader tightening cycle. Now, investors will be assessing the Fed's next steps closely, with any significant shift possibly altering currency momentum.
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). The warning from Hammack aligns with a cautious sentiment that is echoed in the views coming from several market players.
How firms align
JPMorgan has positioned itself in alignment with the notion that inflation concerns could shape Fed policy moving forward, targeting 1.10 for March 2026. Conversely, BofA maintains a contrary stance, suggesting a lower target of 1.04, reflecting a more bearish outlook given the potential for easing inflationary pressures and the subsequent impact on USD valuation.
What the data shows
The recent revisions by various firms signal a potential shift as they recalibrate their views on currency performance in light of inflation risks. Further insights can be found in our research publication on inflation dynamics and FX correlations at /research/inflationfx.
How firms align with this view
Aligned with the headline view
Contrary positioning
Key takeaways
- 01Hammack's inflation concerns may prompt Fed responsiveness affecting the USD.
- 02Traders should remain vigilant to Fed signals regarding policy adjustments.
- 03Watch for USD volatility near the 1.075 consensus target as inflation data unfolds.
Market implications
Traders should monitor the upcoming inflation data releases for signs of pressure that could sway the Fed's strategy. A breach of 1.10 could lead to significant bullish sentiment, while any strong bearish data could test support at 1.04.
Risks to this view
Should inflation expectations stabilize or show unexpected resilience, the current view could reverse sharply, particularly if the Fed signals a continuation of its current policies without adjustment.
Sentiment by currency
USD+EUR~JPY~GBP~Composite USD score: +0.65
Sources & References
How we cover this story