From USD debasement fears to a Fed policy rethink
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 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.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Rabobank | Bearish | 1.1000 |
ING | Bullish | 1.1300 |
MUFG | Neutral | 1.1200 |
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.
Sources & References
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