FX Daily: Dollar bears chase totality
The desk anticipates that a soft US July CPI print could dampen expectations for a September rate hike by the Fed, providing an opportunity for dollar bears. This sentiment is underscored by projections of 0.1% month-on-month inflation for headline and 0.2% for core, which would lead year-on-year rates to fall to 3.4% and 2.5%, respectively. A soft CPI print could lead to a bullish steepening of the yield curve and a softening of the dollar, particularly against procyclical currencies like the euro. Per the full note , the prospect of declining inflation could also support risk assets more broadly, positioning for favorable outcomes in the markets ahead.
What the desk is arguing
The desk argues that a softer-than-expected US July CPI report could significantly impact Fed policy expectations and subsequently pressure the dollar. A consensus of soft numbers is anticipated, particularly due to lower gasoline prices and easing wage growth contributing to core inflation rates falling to near the Fed's 2% target. This could help translate into diminished likelihood for a September rate hike, moving market sentiments toward a more risk-on approach.
Particularly, dollar bears are optimistic that a CPI reading of 0.1% month-on-month on core inflation is not only feasible but could eliminate the 50% probability currently ascribed to a rate hike in September. As markets recalibrate, the expected outcome is a benign dollar drop and increases in risk appetite, especially amongst cyclical currencies, suggesting a shift towards a more favorable risk environment.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.1700, with a range between 1.1200 and 1.2000. Notable firm targets include: - goldman: 1.1200 (Dec-26) - bofa: 1.1240 (Dec-26) - deutschebank: 1.1620 (Dec-26)
This view aligns closely with broader market expectations, but it does reflect a somewhat aggressive stance considering the lower end of the current forecast spectrum; firms such as bofa are notably less optimistic with targets towards the 1.1 area.
How other firms see it
Several firms align with this view, anticipating a weaker dollar against a backdrop of easing inflation pressures, including morganstanley and deutschebank. Conversely, firms like investec and citi are positioned more cautiously, projecting comparatively grounded targets.
Related market dynamics to watch include the USD/JPY movement and Fed communication, which may further inform the dollar's trajectory as inflationary data unfolds. The ongoing interaction between these currencies signals a larger narrative surrounding risk assets and central bank policy across major economies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01A soft US CPI reading could meaningfully reduce Fed rate hike expectations.
- 02Consensus predicts a benign drop in dollar values, enhancing risk asset appeal.
- 03Central to this is a potential core inflation reading of just 0.1% month-on-month.
- 04Watch for shifts in the yield curve reflecting changing market sentiments.
Market implications
Watch for the EUR/USD to approach upwards of 1.17 if the US CPI results meet or are softer than expectations, particularly given the bullish sentiment surrounding procyclical currencies. The positioning of traders ahead of the upcoming data is pivotal in shaping immediate market reactions.
Risks to this view
A significantly higher-than-expected CPI result could reverse the bullish sentiment surrounding risk assets, tightening Fed expectations and strengthening the dollar against the euro. Additionally, any unexpected geopolitical developments could also contribute to volatility in the forex markets.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
MUFG | Bullish | 1.1800 |
Danske Bank | Bearish | 1.1100 |
UBS | Bullish | 1.1800 |
Articles FX Daily: Dollar bears chase totality Published 07:40 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Dollar bears will be hoping that today's US July CPI release is soft enough to banish expectations of a September rate hike from the Fed. If so, that would unlock a benign drop in the dollar and keep risk assets broadly supported Chris Turner , Frantisek Taborsky and Francesco Pesole Markets await a US CPI print that could cool September Fed tightening bets USD: Dollar bears are hoping CPI will deliver Friday's soft US jobs data did not weigh heavily on the dollar. The prevailing view here is that inflation trends will primarily drive the next Fed move.
These are on show today in the form of the US July CPI release. Here, consensus is looking for a reasonably subdued set of numbers: 0.1% month-on-month for headline and 0.2% for core. These would see the year-on-year rates drop to 3.4% and 2.5% respectively – inching closer to the Fed's 2% inflation target.
Driving the softer numbers are expected to be lower gasoline prices, broadening signs of rental deflation and soft wages. Given the market looks to be expecting a softer price story today, we would probably need to see a 0.1% month-on-month read on core inflation – which some think is possible. A soft number should drag market pricing of a September Fed rate hike away from a 50% probability in favour of no change.
And a bullish steepening of the yield curve should see the dollar soften – particularly against the procyclical currencies. On the US yield curve, our rates strategy team warns that the long end could also see some pressure from the fiscal side as the US budget deficit deteriorates on tariff rebates. The above should be positive for the risk environment.
Additionally, talk is emerging that President Trump could be trying to launch a cut in the Capital Gains Tax ahead of the midterms in early November. That would prove a mild dollar negative from a pro-risk perspective, but again we should monitor how the long-end of the Treasury curve would take more unfunded tax cuts and also whether this could tip the Fed over the edge into tightening. For today, let's see whether a soft CPI print can break DXY to the downside from its 99.40-100.00 trading range.
Chris Turner EUR: High energy the problem EUR/USD continues to trade in a lacklustre fashion. Better hard activity data and eurozone economic numbers generally surprising on the upside have failed to provide the euro with much of a lift. That may be owed to unresolved tension in the Gulf, which is keeping European natural gas prices above €60/MWh.
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