Deutsche Bank sees 3 straight Fed hikes after hot CPI, adding a January move
The desk asserts that Deutsche Bank's revised outlook for three consecutive Fed rate hikes significantly alters expectations in the FX market, particularly for USD/JPY. Per the full note , this change is driven by stronger-than-anticipated inflation data, with October CPI rising 0.4% month-over-month against a forecast of 0.3%. The implication is a reinforced bearish sentiment for JPY as markets recalibrate expectations regarding U.S. interest rates, compounded by verbal interventions from Japanese authorities around the 160 level in USD/JPY.
What the desk is arguing
The desk believes that Deutsche Bank's prediction of rate hikes in December, January, and March shifts the narrative towards a more aggressive monetary policy stance well into 2024, which contrasts with current market pricing beyond December. Deutsche's outlook suggests a federal funds target range increase to 4.50%-4.75%, altering trader sentiment and positioning in the dollar space, particularly against the yen.
Supporting this argument, markets have already priced in a December hike at over 95%, which indicates a consensus shift towards the likelihood of additional tightening. Such adjustments to expectations could lead to increased dollar demand while simultaneously pressuring gold prices and foreign equities, particularly in the technology sector, as noted in the commentary.
While Deutsche Bank's forecast now aligns with a more aggressive tightening strategy, UBS maintains a more cautious approach, suggesting hikes only in December and March. This divergence indicates a potential volatility ahead as traders digest the implications of these hawkish signals.
Where it sits in our coverage
Our consensus target for USD/JPY is currently 156.0000, with a range of 149.0000 to 161.7145 as reflected by various firms. Notable forecasts include: - RBC: Dec26 target at 156.0000 - Nomura: Dec26 target at 165.5000 - HSBC: Dec26 target at 145.0000
The desk's view is leaning towards the upper range of market expectations, indicating a stronger dollar outlook amid rising interest rates, which contrasts with firms like CIBC predicting a target of 158.1300. Given the current spot of 156.0000, there’s room for further adjustments if the Fed follows through on its hawkish rhetoric.
How other firms see it
Several firms, including HSBC and CIBC, are more conservative, maintaining their forecasts in the 145.0000 to 156.0000 range, while Nomura sits at the higher end with a more bullish outlook. In contrast, BNP Paribas aligns with the outlook but suggests minimal movement in the near-term.
As the Fed’s trajectory develops, watch USD/JPY closely for signals that might reflect the evolving market consensus. The broader macroeconomic environment, including shifts in oil prices and market sentiment towards AI stocks, could also play a role in guiding JPY movements amid external shocks.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Deutsche Bank anticipates three consecutive Fed hikes, impacting USD/JPY sentiment.
- 02October CPI data validated market expectations for further rate hikes by the Fed.
- 03Current USD/JPY consensus targets show a potential divergence in views among banks.
- 04Japanese authorities have expressed concerns as USD/JPY approaches the 160 level.
Market implications
Traders should monitor USD/JPY as it hovers around critical resistance levels near 160. The upcoming Fed meetings, particularly December's, will be pivotal in determining the dollar's strength against the yen. If Deutsche Bank's predictions are realized, expect market reactions that could lead to increased volatility in JPY crosses.
Risks to this view
A reversal of this call could occur if upcoming economic data drastically undercuts the case for further tightening, or if there’s a significant shift in inflation dynamics that eases pressure on the Fed to hike rates. Additionally, geopolitical risks or unexpected market shocks could disrupt the current trajectory of USD/JPY.
USD/JPY — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
MUFG | Bearish | 159.00 |
Rabobank | Bullish | 145.00 |
ING | Bullish | 152.00 |
A no-pause path into March is more hawkish than markets have priced beyond December. If other banks follow, it would likely be repriced through the front end of the Treasury curve and the dollar. That keeps USD/JPY pressed toward the 160 area where Tokyo is already warning , and it adds to the headwinds for gold.
For equities, a faster sequence of hikes lands at an awkward moment, with AI stocks already under pressure from the Nvidia leadership shock . Oil remains the wildcard: renewed energy-driven inflation would strengthen the case for back-to-back hikes, while a sustained easing in crude would weaken it. --- Deutsche Bank has turned UBS’s “faster tightening” risk into its base case, and the Fed debate is now about the pace after December, not whether December happens. Summary: Deutsche Bank now expects 25bp Fed hikes in December, January and March, adding a January move to its previous December and March path That would lift the federal funds target range to 4.50% to 4.75%, from 3.75% to 4% now The revision followed October CPI, which rose 0.4% m/m against a 0.3% forecast, and which the bank said showed broad-based gains Deutsche Bank won’t rule out a 50bp December hike after Waller’s comments, but it isn’t the bank’s base case UBS keeps a base case of hikes in December and March only Markets price a December quarter-point hike at more than 95%, according to CME FedWatch Deutsche Bank now expects the Federal Reserve to raise interest rates at each of its next three meetings, after adding a January increase to its forecast following a hotter than expected US inflation report.
The bank sees quarter-point hikes in December, January and March. That would lift the federal funds target range to 4.50% to 4.75%, from 3.75% to 4% now. Deutsche Bank had previously expected hikes in December and March, with a pause in January.
The October consumer price report changed that view. Headline prices rose 0.4% on the month against forecasts of 0.3%, and the bank said the data continued to show broad-based gains. The bank also addressed the idea of a larger move.
Before the data, Fed Governor Christopher Waller said a 50 basis point hike should be considered in December if price pressures accelerated, and Deutsche Bank said his comments opened that possibility. It would not rule out a half-point increase, but said a 50 basis point move is not its base case. The revision puts Deutsche Bank at the more hawkish end of the major banks.
UBS, for example, said this week it sees limited support on the rate-setting committee for a 50 basis point step. It keeps a base case of quarter-point hikes in December and March only, although it flagged the risk of more or faster tightening. The two views share a common thread: the debate has shifted from whether the Fed hikes in December to how quickly it follows through.
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