FX Daily: Bond sell-off helps USD consolidate gains
The desk argues that the USD is poised to consolidate its recent gains as a response to a broad sell-off in global bonds, which has created a risk-off atmosphere favorable to the dollar. Per the full note from ing-think, this sell-off has caused back-end yields to rise, effectively shifting risk sentiment and correlating with a reluctance to bolster positions in oil, consequently anchoring USD strength. Market expectations now fully price in two rate hikes by January 2027 and nearly four by July 2027, indicating that this dollar rally may have more fuel. Notably, EUR/USD is near a key support level of 1.1320-1.1330, with potential for further declines if oil prices spike again, aligning with our expectation of Brent reaching $110/bbl shortly.
What the desk is arguing
The desk is highlighting that the recent bond sell-off is exerting pressure on market risk sentiment, resulting in a supportive backdrop for USD pricing. As back-end yields climb, the USD has consolidated gains, shifting sentiment away from riskier assets, thereby lending increased resilience to the dollar against major pairs, particularly in light of calls for further rate hikes from the Federal Reserve.
The implications of the continued sell-off suggest the possibility of further tightening from the Fed, with the 2-year Secured Overnight Financing Rate (SOFR) increasing by nearly 20 basis points recently. This trend reflects market confidence in sustained monetary policy adjustments. Therefore, the desk appears cautious about forecasting the end of the USD rally amid these prevailing dynamics.
Where it sits in our coverage
Our current consensus target for EUR/USD stands at 1.1700, with a range from 1.1200 to 1.2000. For Dec-26, notable firm targets include: - BofA: 1.1500 - RBC: 1.2000 - Morgan Stanley: 1.2150
This position indicates that the desk’s outlook is at the lower end of the consensus spectrum, hinting at potential further declines before recovery. The anticipated fluctuations in oil prices and rates suggest an evolving landscape, which would require close monitoring to validate or adjust USD positioning.
How other firms see it
Aligned firms view the USD’s resilience as likely to continue, particularly in the face of rigorous monetary tightening. Firms like Morgan Stanley and RBC are reinforcing this bullish trajectory for the greenback over the coming months, while BofA holds a more skeptical view, projecting slightly lower targets for EUR/USD.
As the dynamics surrounding USD may be impacted by global oil price movements, attention should particularly focus on the interplay between the Fed's policy decisions and the evolving energy markets, which could catalyze movements in pairs such as USD/CHF and USD/JPY as well.
How firms align with this view
Key takeaways
- 01The USD is consolidating gains due to a global bond sell-off and rising back-end yields.
- 02Expectations of ongoing Federal Reserve rate hikes support the bullish outlook for USD.
- 03Key support level for EUR/USD is at 1.1320-1.1330, with volatility likely tied to oil prices.
- 04Consensus target for EUR/USD stands at 1.1700, indicating potential room for further declines.
Market implications
Watch for key levels around 1.1330 for EUR/USD, as further declines could lead to strengthened dollar positioning. Keep an eye on Brent potential reaching $110/bbl to gauge USD sensitivity against oil.
Risks to this view
A reversal in this bullish dollar sentiment could occur if oil prices stabilize or geopolitical tensions resolve, reducing the risk-off sentiment and prompting a realignment in market expectations regarding Fed rate hikes.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Bank of America | Bullish | 1.1500 |
Scotiabank | Bullish | 1.1700 |
ANZ | Bullish | 1.1700 |
Articles FX Daily: Bond sell-off helps USD consolidate gains Published 07:23 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The rise in back-end yields has prompted a risk-off environment that favours a consolidation of recent dollar gains. Markets remain reluctant to price in any optimism into oil prices, which keeps risks on the upside for rates. EUR/USD may still have some room to fall before recovering Francesco Pesole and Frantisek Taborsky The dollar is benefiting from the knock-on effects of the bond sell-off on global risk sentiment USD: Keeping an eye on the back-end The global bond sell-off continues to leave its mark on FX.
The dollar is benefiting from the knock-on effect on global risk sentiment, allowing a consolidation of recent gains even as they start to look stretched relative to short-term fundamentals. Oil prices remain bid after the UN summit failed to generate tangible optimism about a resolution in the Gulf. Reports that the US and Iran are discussing a phased deal to reopen the Strait of Hormuz prompted a correction in oil, but losses were fully recouped within a couple of hours, underlining growing scepticism about any imminent de-escalation.
It is a dynamic that argues against any material rebound in bonds for now. By extension, we remain cautious about calling the end of this USD rally. We may see $110/bbl for Brent before the end of the month, with the dollar finding fresh support from the energy story, especially in an environment where the Fed's hawkish remarks are allowing markets to price in more rate hikes.
A testament to that is the 2-year SOFR, which is up almost 20bp over the past 48 hours. Pricing for October has now reached 18bp, with two hikes fully priced in by January and almost four by July 2027. Francesco Pesole EUR: France a rising concern We still view the 1.1320-1.1330 area as the next key support for EUR/USD.
We could reach that level quite quickly if oil prices take another sharp leg higher and/or US data surprises to the upside over the next couple of weeks. For now, we do not think new lows are imminent, but downside risks persist. As for euro-specific drivers, economic resilience ( yesterday’s Ifo index mirrored strong PMIs) is at least partly being offset as a EUR-positive factor by wider eurozone spreads.
French 10-year yields are trading 110bp above bunds, and there has been little relief from reports that Marine Le Pen may back the proposed budget to avert a bond crisis. We analysed France’s fiscal issues in this note . Risks are tilted towards further spread widening from here, and while the FX impact remains difficult to isolate, it is a narrative that is unlikely to help the euro in the current environment.
Sources & References
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