Hawkish Fed triggers emerging market outflows in September
September marked a significant shift in the emerging markets landscape as foreign investors withdrew $26.3 billion amid a hawkish stance from the Federal Reserve. This marks the first outflow since June, driven by rising U.S. yields and a strengthening dollar, which raises the stakes for emerging market assets. The implications are broad, suggesting that investor confidence is faltering against the backdrop of aggressive U.S. monetary policy, making it critical to monitor future Fed communications and economic indicators.
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). This suggests a cautious outlook for the pair as emerging markets feel the pressure from a robust dollar.
How firms align
JPMorgan's latest forecasts align with the current market anxiety, projecting a target of 1.10, indicating they expect the dollar to maintain strength against the euro through Q1 2026. Conversely, BofA remains more bearish, predicting a drop to 1.04.
What the data shows
The recent trends indicate a tightening of liquidity in emerging markets, as reflected in our reports. Additionally, the implications for USD strength should be monitored closely through upcoming Fed announcements and economic data releases.
How firms align with this view
Aligned with the headline view
Contrary positioning
Key takeaways
- 01Emerging markets experienced $26.3 billion in outflows in September.
- 02Focus on Fed guidance may reshape market positioning.
- 03Key support levels for EUR/USD are under pressure amid dollar strength.
Market implications
Investors should watch the EUR/USD level closely around 1.075 for potential breakouts. Fed meetings later this month could signal further tightening, impacting the dollar's trajectory.
Risks to this view
Any reversal in Fed policy signaling a dovish pivot could invalidate current bearish sentiment towards emerging markets. A surprising drop in inflation could be such a catalyst.
Sentiment by currency
USD+EUR JPY GBPComposite USD score: +0.75
Sources & References
How we cover this story