FX: Cyclical dollar bullishness takes over
The desk is adopting a bullish stance on the US dollar, aligned with emerging cyclical factors suggesting a rally. Per the full note from ing-think, investor sentiment has shifted significantly from fears of a structural dollar decline to anticipation of a cyclical rebound, in part due to a prolonged period of tighter US monetary policy. Current data highlights that European buy-side hedge ratios for the dollar have returned to under-hedged positions at around 68%, underscoring confidence in holding dollar-denominated assets. Meanwhile, the consensus target for EUR/USD currently sits at 1.1717, with projections pointing to a gradual ascent towards 1.2000 by year-end. This context underscores the pivotal role of evolving US monetary dynamics, particularly as recent forecasts suggest no immediate high-impact events ahead that might disrupt this trajectory.
What the desk is arguing
The desk believes cyclical factors are now driving dollar strength, marking a distinct shift from the previous narrative of structural vulnerability. Per the full note by ing-think, the current positioning indicates a renewed confidence among investors in the dollar, as indicated by a movement towards lower hedge ratios in euros.
Supporting this bullish outlook, European buy-side data reveals dollar hedge ratios have dipped to about 68%, well below the normal 73% expected level. This suggests that there is a growing willingness to accept FX risk, which contrasts sharply with the recent past when the dollar was seen as structurally weak and over-hedged.
Where it sits in our coverage
Our current spot for EUR/USD stands at 1.1679, with a consensus target for March 2026 of 1.1717, which spans a range from 1.1200 to 1.2000. Notably, firms such as Commerzbank and Barclays have set their December targets at 1.2200 and 1.2100, respectively.
This view aligns closely with the upper bound of current forecasts, particularly with barclays expecting a target of 1.2100 by December 2026, indicating a general alignment among firms for a bullish euro outlook against the dollar amidst the shifting dynamics.
How other firms see it
Several firms are aligned with this bullish dollar narrative, including bnpparibas, which is forecasting 1.2100 for December 2026, and mizuho, targeting 1.1700 for the same period. Conversely, wellsfargo and anz exhibit a more cautious view, projecting lower levels of only 1.2000 and 1.1400, respectively, reflecting divergent perspectives on the dollar's strength.
Monitoring USD/JPY may also be crucial, as the trajectory of that pair could indicate broader sentiment shifts in the FX market, particularly in light of ongoing monetary discussions in Japan and the US Federal Reserve's stance on interest rates.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The market sentiment is shifting towards a cyclical dollar rally as confidence grows in holding dollar assets.
- 02European investors are currently under-hedged on their dollar exposure, suggesting a favorable environment for dollar strength.
- 03The consensus target for EUR/USD indicates a gradual bullish outlook, likely influenced by the prevailing US monetary policies.
- 04No significant calendar events are anticipated in the near term that could disrupt this evolving FX landscape.
Market implications
Traders should keep a close watch on the EUR/USD level around 1.1679; a breach above this could signal momentum towards the consensus target of 1.1717. Additionally, tracking USD/JPY might offer insights into shifts in dollar sentiment, especially as market participants remain attentive to interest rate trajectories from the US Federal Reserve.
Risks to this view
A potential catalyst for reversing this bullish stance could be a deviation in the Federal Reserve's monetary policy signal, such as a pivot towards easing or higher-than-expected rate cuts that could undermine the dollar's strength. Moreover, significant geopolitical developments or economic shocks could also impact investor sentiment and positioning.
Articles FX: Cyclical dollar bullishness takes over 10:33 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download After much discussion about a structural decline in the dollar last year, investor sentiment is now swinging towards a cyclical dollar rally. Bearish flattening of the US yield curve is once again the dominant theme, but this is not 2022, and the dollar does not have to rally that far Chris Turner Investor sentiment is shifting back towards a cyclical dollar rally as markets price a more prolonged period of tighter US monetary conditions Structural factors postponed A year ago, shortly after the ‘Liberation Day’ tariffs in April, the dollar was licking its wounds after a 12% year-to-date decline. At that time, evidence pointed to the European buy-side having been very under FX-hedged on their US investments and being forced to raise their hedge ratios in a hurry.
There was also much discussion about a structural loss of confidence in the dollar and the loss of its safe-haven status. On the subject of hedge ratios, the latest data from the Danish pension fund industry once again points to a European buy-side running dollar hedge ratios below levels which could normally be expected with respect to hedging costs. During March and April this year, dollar hedge ratios were pared back to the 68% area – well below the 73% level which would normally be expected given the cost of hedging US risk back into euros.
This suggests that the buy-side is once again happy to run dollar FX risk. Far from structural factors triggering an over-hedged position, the European buy-side is again drifting back towards under-hedged positions in the dollar. European buy-side happy to run low dollar hedge ratios again Source: Danish Central Bank, LSEG "> Source: Danish Central Bank, LSEG Cyclical factors in play We had taken a position over the last year questioning the calls for a structural decline in the dollar .
None of the data really supported that contention, whether it be the currency share in FX reserve portfolios, transaction preferences, FX preferences for debt issuance or indeed, foreign holdings of US assets. Instead, we felt the cyclical story would again dominate – and that cyclical story has undergone a substantial reversal over the last six to eight weeks. Far from the benign environment of bullish yield curve steepening in the US as the Federal Reserve prepared to cut rates back to neutral at 3.25%, markets have witnessed bearish flattening on the assumption that the Fed will need to apply the monetary policy brakes after all.
That cyclically bullish dollar story looks set to dominate over the coming months as the Fed rides out the inflation spike at a time of stable employment. The fact that we are pushing our call for a Fed rate cut back from this December and deep into 2027 is clearly going to create some headwinds to EUR/USD. Additionally, higher energy prices through the rest of 2026 – especially our call for a belated pick-up in natural gas prices – mean that we have to cut our EUR/USD forecast profile.
That means EUR/USD could be pressured into the 1.13/14 region over the coming months, and that any pick-up into year-end could lack momentum. And any bullish momentum for EUR/USD could in fact be postponed until next spring/summer if the Fed really is able to bring rates lower at that time. Instead of a year-end 2026 forecast of 1.20, EUR/USD could be struggling to make it much above the 1.16/17 area.
But we certainly are not looking for the kind of Fed tightening cycle seen in 2022 nor the magnitude of the spike in natural gas prices seen in that year either. That means EUR/USD does not need to trade aggressively lower. Some defensive European Central Bank tightening is also providing some defence to the euro.
US real rates moving higher - but this is not 2022 Source: LSEG, ING "> Source: LSEG, ING Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Chris Turner Global Head of Markets and Regional Head of Research for UK & CEE Chris is Global Head of Markets and Regional Head of Research for UK & CEE.
Together with his team, he provides short and medium-term FX recommendations for ING's corporate and… In this article Structural factors postponed Cyclical factors in play
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