FX Daily: Consensus Fed hike can still lift USD
The desk anticipates a clear U.S. Federal Reserve interest rate hike of 25 basis points (bps) to 4.0%—a widely expected move that should support the U.S. dollar. Per the full note , while a hold or strong dovish message could hurt the dollar, the upcoming Fed meeting is likely to reinforce hawkish positioning given current market implications and treasury conditions. Markets are already pricing in further increments totaling about 52bps by year-end and 89bps by June 2027, underscoring the prevailing sentiment towards continued tightening. If Chair Kevin Warsh signals any openness to further hikes, we could see a robust support for the dollar against major currencies like the euro (EUR/USD) and the yen (USD/JPY).
What the desk is arguing
The desk frames the upcoming Fed meeting as a pivotal moment for the USD. Amid market expectations for a 25bps hike, Chair Warsh’s readiness to signal additional tightening could reinforce the dollar’s strength, especially against other majors like the EUR and JPY.
Current positioning reflects a strong consensus among traders, with the Fed's hike fully priced in, indicating that a surprise hold would create a significant bearish scenario for the dollar. This sentiment is echoed in the bond market, where a preemptive hawkish message may alleviate potential volatility in Treasury yields.
Where it sits in our coverage
Our internal consensus for the EUR/USD pair is currently at 1.1700—sitting within a tight range of 1.1200–1.2000, suggesting expectations of slight weakening against the dollar if Fed dynamics play in favor of tightening. Specifically, firms such as socgen (1.1400), rbc (1.1700), and morganstanley (1.2000) reflect this expectation.
A divergence in sentiment is noted, with the morganstanley target remarkably higher than others as the consensus is generally more bullish on the euro relative to our desk’s caution towards USD strength.
How other firms see it
Firms aligned with the dollar’s strength include socgen and rbc, both of whom have set targets that underscore a similar bullish sentiment towards USD. In contrast, nomura and barclays provide less aggressive targets which could imply a more cautious outlook for the USD against the euro and other pairs.
In this context, USD/JPY is particularly relevant as market participants are closely monitoring any shifts in relative monetary policy expectations, especially with the Bank of Japan’s positioning influencing JPY's strength against the USD.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Market fully expects a 25bps Fed rate hike today, positioning the USD for potential gains.
- 02A dovish message or surprise hold could materially weaken the dollar against major pairs.
- 03Chair Warsh's press conference will be critical for market sentiment, specifically regarding future rate hikes.
- 04Internal consensus suggests EUR/USD targets are relatively bullish compared to USD outlook.
Market implications
Keep an eye on EUR/USD at 1.1700; potential divergence exists based on Fed statements. Watch USD/JPY dynamics, particularly for any shifts linked to Fed communication around monetary policy. Traders should position accordingly as market sentiment evolves post-announcement.
Risks to this view
Should the Fed adopt a dovish stance or signal a pause in rate hikes, we could witness a sharp reversal in USD strength, particularly against EUR and JPY. Additionally, negative economic surprises or significant shifts in inflation expectations could undermine the dollar's position.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Rabobank | Bearish | 1.1000 |
ING | Bullish | 1.1300 |
MUFG | Neutral | 1.1200 |
Articles FX Daily: Consensus Fed hike can still lift USD Published 07:55 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Markets are fully expecting a 25bp hike to 4.0% today, and a surprise hold or strong dovish dissent could have a materially negative impact on the dollar. But that’s a small risk, as the FOMC is likely mindful of any adverse Treasury-market implications. Openness to further hikes by Warsh can leave the dollar broadly supported Francesco Pesole and Frantisek Taborsky A Federal Reserve hike of 25bp is widely expected today USD: Warsh can give dollar a bit more help We expect the Fed to raise rates by a consensus 25bp to 4.0% today.
Markets are pricing in 23bp for today, 52bp by year-end, and 89bp by June. A surprise hold would likely deliver a big blow to the dollar: both through the dovish repricing in front-end rates and a likely selloff in the back end. The Fed is likely well aware of that risk for Treasuries, which should keep the probability of a hold low.
That, in our view, also argues for a hawkish message. A dovish hike may not be enough to convey the monetary policy discipline bond investors currently demand, particularly given the amount of tightening already priced into swaps. Recent bond market headlines may even have helped bring some FOMC members behind a hike, reducing the likelihood of visible dissent, at least for now.
If anything, the new economic projections pose some risk of dovish disappointment. Inflation may be revised slightly lower, while our economists expect the median dot plot at 4.0% in both 2026 and 2027, well below market pricing. Even so, we think Chair Kevin Warsh’s press conference will be the key driver of the market reaction.
Any openness to further tightening can support the dollar by reinforcing policy credibility and countering any debasement trade risk premium. Incidentally, the external picture argues against building sizeable USD shorts at this stage. Brent is aiming for $110/bbl, as Iran-Gulf negotiations are delayed again, and softness in tech stocks is weighing on overall sentiment.
These conditions suggest markets are more likely to fade a negative dollar reaction to the Fed today, unless triggered by a significant dovish surprise, rather than a positive one. Before the Fed, the August US retail sales release is also due. However, with such a major risk event looming, we expect a relatively muted market response.
Francesco Pesole EUR: 1.150 test can come sooner than later Today’s Fed announcement can take EUR/USD closer, if not all the way, to our 1.150 target. We are not ready to call an imminent end to the decline given the energy price backdrop, but below 1.150 the risks should become more balanced from a technical/short-term valuation perspective. Short-term rate differentials wouldn’t accommodate big moves lower, and the risks of any political/domestic risk premium build-up appear more concentrated on the US ahead of the midterms than the eurozone (even though the French budget is a concern).
Sources & References
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