FX Daily: 50/50 Fed call keeps risk assets in demand
Current dynamics in the FX market indicate a resilient demand for risk assets, spurred by dovish comments from Fed's Christopher Waller, which have led to declines in US yields and the dollar. This sentiment aligns with a current 50% probability of a Fed rate hike in September, suggesting traders are cautious but optimistic. Per the full note, the forthcoming US non-farm payrolls are expected to be underwhelming, which, if realized, may strengthen the case for holding rates steady. This sets the stage for ongoing strength in high-yield currencies like the EUR and GBP, with market sentiment leaning towards demand for these currencies amidst a backdrop of stabilizing risk appetite.
What the desk is arguing
The desk is focused on the prevailing demand for high-yield currencies, driven by the Fed's seemingly dovish stance as articulated by Waller's recent comments. This reflects a pivotal shift as market participants recalibrate their expectations on US interest rates, potentially favoring non-USD assets in the near term.
Specifically, Waller's remarks have necessitated a rethinking of rate hike probabilities, with the market now pricing in a 50% chance of a hike versus the previously more hawkish stance. This has manifested in a measurable 5 basis points drop in short-dated US yields and a notable softening of USD/JPY toward 155, suggesting a positive shift for procyclical currencies.
Where it sits in our coverage
For the EUR/USD pair, our current spot is 1.1446 with a median Dec-26 target of 1.1700, reflecting a range from 1.1200 to 1.2000. Key firms supporting similar targets include ing (1.1700), rbc (1.1700), and morganstanley (1.2000).
This view shows alignment with broader market expectations but sits comfortably within the median range established by cross-firm forecasts, indicating potential for further upside in procyclical currencies if current trends continue.
How other firms see it
Firms that align with this perspective include ubs and barclays, both showing positive targets for the euro in the medium term, while firms like nomura and jpmorgan express slightly more cautious attitudes.
The trajectory of EUR/USD aligns with upcoming ECB policy considerations, as expectations of ECB actions will weigh heavily on Eurodollar dynamics in the coming months. Similarly, the upcoming US job data will be critical for shaping the narrative around the USD's short-term outlook.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Waller's dovish comments are impacting USD and yields negatively.
- 02Market pricing suggests a 50% probability for a September Fed rate hike.
- 03Demand for high-yielding currencies like EUR and GBP remains robust.
- 04Upcoming US jobs data is likely to influence Fed policy outlook.
Market implications
Traders should closely monitor the 155 level in USD/JPY, alongside the upcoming non-farm payrolls, for any shifts in positioning. Positive surprises in payrolls could energize the dollar, while disappointing results may maintain the euro's momentum towards the 1.1700 target.
Risks to this view
A significantly stronger jobs number could challenge the current dovish sentiment and shift expectations toward a Fed hike sooner rather than later. Additionally, unexpected inflation data could ripple through the markets, altering Fed dynamics and impacting currency valuations significantly.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Goldman Sachs | Bearish | 1.1200 |
J.P. Morgan | Bearish | 1.1300 |
UOB | Bullish | 1.1800 |
Articles FX Daily: 50/50 Fed call keeps risk assets in demand Published 07:50 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Some surprisingly dovish remarks from the Fed's Christopher Waller yesterday sent US yields and the dollar lower, while at the same time sending equities higher. Neither the prospect of a Fed hike nor the surge in the yen has been enough to dent demand for high-yielding FX. That environment looks unlikely to change today, regardless of the US jobs data Chris Turner , Frantisek Taborsky and Francesco Pesole Recent dovish remarks from the Fed's Christopher Waller have weighed on the dollar and helped risk assets USD: Probably more downside risks to the dollar today Yesterday's speech from the Federal Reserve's Chris Waller was a little more dovish than most were expecting.
Rather than reinforcing Chair Kevin Warsh's hawkish speech from a week ago, Waller's remarks shifted the burden of proof towards the need for a hot August inflation print to justify a rate hike – otherwise he would vote for a hold. Short-dated US yields came off 5bp and USD/JPY fell close to 155. Market pricing for a Fed rate hike in September now stands at exactly a 50% probability.
Feeding into the story a little will be today's August non-farm payrolls data. We say 'a little' because the Fed seems to be reasonably comfortable with the labour market right now and is squarely focusing on the price side of its dual mandate. On payrolls, consensus expects a softish +55k number, with the 'whisper' number lower at +30k.
The unemployment rate is expected to remain low at 4.1%, which the Fed sees as close to full employment. True, another negative jobs number today would make the optics of the Fed hiking rates later this month a little harder – but the lasting impact for financial markets should come from inflation rather than labour market data. High yield and procyclical FX remain in demand for the time being.
Given the hot debate over whether the Fed raises rates at all, it looks like investors are concluding that any Fed tightening cycle will be very modest and not enough to derail a relatively benign investment backdrop. That presents a mildly negative backdrop for the dollar in the short term. And barring a very strong NFP number today, which would firm up a September rate hike, we could see the dollar drifting a little lower. 99.15/20 could cap DXY intraday strength, with risk to 98.60 on soft payrolls.
On a more multi-day view and given our new house call for a 25bp Fed hike , we tend to see the dollar as relatively stable into year-end now. Chris Turner EUR: Unwinding the Warsh sell-off EUR/USD is drifting higher as markets unwind the moves made on the back of Warsh's speech a week ago. EUR/USD had been trading around 1.1650 before that speech and looks to be grinding back in that direction now.
Sources & References
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