The desk posits a cautious outlook for USD pairs following the latest remarks from Fed Chair Kevin Warsh at Jackson Hole, highlighting a recalibration of market expectations around future Fed policy. Per the full note from MUFG EMEA, discussions emphasize concern over inflation not reverting to the 2% target swiftly, despite core PCE still elevated at 3.3%. The bleak assessment of financial conditions suggests a limited capacity for USD strength against other major currencies. As we look ahead, the lack of high-impact calendar events could leave traders reacting to market sentiment and economic data in the interim.
What the desk is arguing
The desk frames this as a pivotal moment for the USD, with concerns about inflation and Federal Reserve credibility coming to the forefront. According to MUFG's analysis, market pricing for a rate hike in September was only around eight to nine basis points heading into Warsh's speech, indicating minimal expectations for immediate policy changes.
Derek Halpenny pointed out that even with inflation trends, financial constraints don't appear sufficiently tight to justify aggressive Fed actions. The commentary suggests that should inflation continue to miss target expectations, the belief in a strong USD could weaken, particularly against currencies like the EUR and GBP.
Where it sits in our coverage
For EUR/USD, our consensus target is 1.1700, with a range between 1.1200 and 1.2000. Notably, firms such as stanchart and ing project targets of 1.1400 and 1.1700 for March 2026, respectively, reflecting a modest divergence in outlook.
This perspective aligns closely with the lower bounds of the forecast spectrum, where several firms maintain conservative targets, suggesting minimal expected appreciation for the USD against the euro.
How other firms see it
Several firms, including ubs and morganstanley, hold relatively optimistic views on GBP/USD, projecting targets towards the higher end of the range. In contrast, nomura and commerzbank express more bearish sentiments, forecasting lower exchange rates for the pound.
Additionally, movements in USD/JPY could also reflect the broader implications of Fed policy, particularly given the BOJ’s current stance, which may further influence USD movement over the coming months.
01The desk is cautious on USD strength following Fed Chair Warsh's speech, emphasizing inflation concerns.
02Market consensus sees limited expectation for a September rate hike, with only 8-9bps priced in.
03The projection for EUR/USD is consistent with moderate targets across various firms, reflecting bearish sentiment on USD.
04USD/JPY will be critical to monitor, given the implications of Fed policy shifts against the BOJ's stance.
Market implications
Watch for potential shifts in sentiment around incoming inflation data, as any significant deviation could impact the USD's performance against the EUR and GBP, particularly as targets are closely clustered around current levels.
Risks to this view
A surge in core inflation moving closer to the Fed's target could prompt a reassessment of the Fed's policy approach, leading to unexpected USD strength. Additionally, geopolitical developments or economic data surprises could disrupt current trends and expectations.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halperny, Head of Research, Global Markets, EMEA and International Securities. It's Friday, 28th August 2026, and joining Derek to pose some questions on the financial market themes for the week ahead is Simon Mays, Head of UK, Ireland and Swiss FX Corporate Sales. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.
It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hey Derek, happy Friday.
The same to you Simon. How are you? I'm very well, thank you.
Good, good. I think the best place to start is probably going to be Jackson Hole. It seems like we've been waiting for it all week.
It's the big focus this week. Always a lot of focus on Jackson Hole, but most of the time it doesn't really have too much impact. There are a couple of notable times in the past when it has.
How did you view Walsh's speech this time round from a surprise perspective? Well, I think the first point I'd make is going into the speech, the pricing for a hike in September was just nine basis points, eight to nine basis points. So my feeling going into the speech was that that was a little bit on the low side, just because the inflation data alone is still pretty elevated.
The core PCE at 3.3%. So in that sense, we've had the kind of reaction that you'd expect. His wording on inflation is, again, given where inflation is at the moment, is not hugely surprising.
But we have work to do if inflation not moving to 2% wit speed. And I think it's the wit speed that may kind of spook the markets in terms of reconsidering September, because you certainly can't say it's moving with speed towards target. Also, it's hard pressed to say financial conditions are restrictive, and inflation data doesn't suggest trend meaningfully improved.
So, you know, you're talking about, in their view, an economy that's at full employment, you're talking about an economy where inflation is above target and not coming down. And you have financial conditions that aren't restrictive. In any normal-ish world, the market would very quickly be priced for a hike on the 16th of September.
So I wouldn't be surprised if we see a continued gradual grind in that direction, given we're still only around 50-50. Now, I think the reason why we're only, you know, we're only at 50-50 is obviously you've got a payroll support, you've got another set of CPI figures before the FOMC meeting. So, you know, the holdouts will point to those data points.
While I can understand that to a degree, you could also easily argue that if you did get a surprise downside move in the CPI data, it would probably need to be backed up by pretty weak payrolls. And even then, you know, you'll have someone saying, well, that's just one data point. And the bigger picture is inflation is still sticky, it's still above target.
So certainly based on today's comments, and of course, we've come in with the market still reacting as we speak, but it does look like there's the scope there for at least the market to move up its pricing in terms of the probability of a hike in September. And in that context, obviously, the dollar move is understandable. You know, I think short term, we can definitely see some further move to the upside.
Yeah, on that point, I guess, you know, dollar debasement has been the buzzwords, if you like, for a little while. It's been a big story up until Jackson Hole seems to have faded. So yeah, any thoughts on that?
Yeah, like, again, we've done some analysis where we've kind of picked out episodes of dollar debasement being a theme. And we've pulled out periods of kind of, we've looked at data back since 2015. And based on averages, and then Z scores, we've picked out extreme moves, sudden moves for the dollar weaker, gold higher, and then looked at what happens at treasury yields.
And what comes back is that basically, dollar debasement episodes tend to be quite fleeting, especially if rates go up. Now, if rates move to the downside, then that dollar debasement team can extend and you can get bigger, bigger dollar moves. But of course, if rates are going down, then dollar debasement isn't purely there in evidence, and it's maybe become something more cyclical as well.
So I'm not too surprised that the debasement kind of focus has been fleeting, rates have gone up. And then even if you look at what's behind the move up in real yields, you know, the whole debate about term premium, is it fiscal risks? If you look at sovereign spreads over OAS swap rates, it doesn't look like there's been any deterioration of fiscal risks into the buyback announcement.
Inflation expectations are relatively stable. So it looks more like it's AI related capital demand. And in that sense, again, that's not the recipe for a sustained dollar depreciation.
So after Warsh's speech, you know, if you look back to the buyback announcement on the 19th, the DXY high in the day was I think 99.70, 99.75. We're trading 99.50 now, I think we can obviously get back up to those levels from when the buyback announcement was made. And then I think, you know, we can certainly grind up to the 100 level on DXY.
And what do you think that might mean for Dolly Yen? Obviously, there's been a lot of focus on Dolly Yen this year. We had Jimeno speaking earlier in the week.
Do you have any thoughts on that speech and the levels of intervention that have been confirmed between July and August from the Ministry of Finance? Yeah, like Jimeno's speech, Dolly Yen bounced by about 25 pips on the back of the speech. I think there was just a little bit of disappointment that there wasn't something a bit more explicit in terms of timing.
I wasn't expecting something explicit given, you know, there's still roughly three weeks until the actual meeting and they wouldn't give something strongly explicit in that time frame. But it was hawkish enough for me to keep the pricing as it was, which is roughly 80% probability of a hike in September. So the fact that the pricing remained the same is an effective endorsement from one of the most senior members of the BOJ, the Deputy Governor, on the current market pricing.
So to me, it was still indicative of the BOJ moving in September. And we certainly still expect that. So, you know, the speed is picking up and Jimeno's speech, he was using an analogy of a foot on the accelerator in terms of speeding up the pace of tightening, and that when you're below neutral, you can put the foot down.
But then external factors, risks, etc, etc, could mean you have to adjust the pedal. So he was kind of talking about implying that the pace is picking up, but that there would still be caution going forward from the BOJ in terms of, we shouldn't assume, for example, a linear new pace going forward of every three months, because they hiked in June and they're hiking again in September. We don't expect a move in December.
We do expect one in January 2027. So that still keeps us on track with a kind of faster pace than what we were used to before. And then that gets you in line with hitting neutral, which is probably 175 to two on nominal rates, which we would definitely envisage seeing in 2027.
Good. And one last story that, you know, has been of interest this week. But it was interesting to me that despite the trade deal breaking down between the US and Canada, the CAD sell-offs have been quite well contained.
Why do you think that's been? Well, I think firstly, the actual tariffs that went effective was just about 5% of Canadian exports in the US. So it was a pretty small amount.
Dollar CAD has jumped, but as you said, it is contained. I think the real escalation will come potentially next year. So the retaliatory tariffs on autos and light trucks is effective 1st of January 2027.
And as you and I know, everybody who trades risk in the markets know, you don't trade Trump today on something he's threatening in three months time, because it's all part of the negotiation process. What I would say, though, is that if we don't get any progress and the markets start to really think that that is an actual tariff that could be put in place by 25% up to 50%, and that's on a much bigger portion, it's like between 10 and 15% of exports, then it gets a bit more serious, definitely. And in any way, looking at just relative macro and rate spreads, dollar CAD had overextended to the downside last week on expectations of a deal being done.
We've retraced some of that, but based on relative macro, we should already be north of 140. So if things continue to worsen, I would certainly expect us to be north of 140 and potentially, you know, getting up towards the mid 140s if these tariffs are implemented. So we still need to see how that plays out over the next couple of months.
Got it. Well, it's great to hear your views as always, Derek. Thank you very much for your time.
Thanks, Simon. Have a great weekend. And have a good weekend yourself.
Cheers. Thank you for listening to this MUFG Global Markets podcast. Rate, review and subscribe.
Contact your MUFG sales rep for more information. Come back next week for more insights from the Global Markets Research Team.
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