FX Daily: Dollar debasement trade in retreat
The desk views the dollar as maintaining its support ahead of a critical US May CPI release, as detailed in the latest research from ING. With real rates having surged by 60 basis points over the past six weeks, market participants are anticipating a likely December Fed rate hike contingent on core CPI performance. This sets the stage for potential dollar strength unless today's CPI data reveals weaknesses in consumer spending, particularly in the shelter sector, which might soften short-term rates and, by extension, the dollar's value. Per the full note, a solid core CPI number today would likely fortify bullish sentiment around the dollar.
What the desk is arguing
The desk is arguing that the dollar is likely to remain well-supported in anticipation of the US May CPI release. As noted in the source commentary, expectations of a Fed response to rising inflation have seen real rates rise significantly, reversing the trend of last year's dollar debasement in the process.
The key detail to monitor today is the core CPI, which is projected to show a 0.3% month-on-month increase and 2.9% year-on-year. Should these figures manifest as forecasted, the anticipation of a Fed hike in December will likely keep the dollar on the bid side, reinforcing the narrative of a strong dollar backed by robust inflation data.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.1700, with a range of 1.1200 to 1.2000 by December 2026. Notable firm targets include: - mizuho: 1.1700 - barclays: 1.2100 - jpmorgan: 1.2000
This position marks a slight alignment with the broader consensus; however, it sits at the higher end of the projections, signaling a bullish sentiment regarding the dollar's trajectory against the euro.
How other firms see it
Aligned firms such as mizuho and jpmorgan anticipate continued dollar strength based on forthcoming economic data. Conversely, firms like citi position themselves more conservatively, favoring a lower euro target by December 2026.
The trajectory for USD/CAD, reflecting BoC rate paths, is also relevant, as shifts in oil prices could impact this pair in conjunction with any dollar movements post-CPI release.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The dollar remains supported in the wake of rising real rates.
- 02Today's core CPI data will be pivotal in determining market sentiment.
- 03If core CPI underperforms, there could be a risk of dollar weakness.
- 04The expectation of a Fed rate hike in December remains intact.
Market implications
Traders should watch for the core CPI release today, as a stronger print would solidify a bullish outlook on the dollar. Key levels to monitor include current spots for EUR/USD at 1.1600 and USD/CAD at 1.4000.
Risks to this view
A print below 0.3% for core CPI could trigger a reconsideration of Fed tightening expectations, potentially leading to short-term dollar softness. Additionally, any sudden shifts in equity markets related to earnings reports could add volatility to dollar positions.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Scotiabank | Bearish | 1.1200 |
Bank of America | Bearish | 1.1200 |
ANZ | Bearish | 1.1400 |
Articles FX Daily: Dollar debasement trade in retreat 07:52 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The dollar remains reasonably supported as the market awaits today's US May CPI release. Growing expectations that the Fed will have to respond to this year's inflation shock have seen US real rates rise 60bp over the last six weeks and force an unwind of last year's dollar debasement trade. Assuming core CPI stays firm today, the dollar should stay bid Chris Turner , Frantisek Taborsky and Francesco Pesole USD: Core CPI will be key today The dollar is largely holding onto its gains made last week.
Equity markets remain very volatile as investors shuffle portfolios ahead of Friday's SpaceX IPO. Oracle is due to report earnings after the close today to provide the latest insight into the AI data centre buildout and its revenue opportunities. But it is a big day for US economic data too.
The highlight will be the release of the May CPI report, where headline inflation is expected to rise above the 4.0% YoY level for the first time since May 2023 and core CPI is expected to rise 0.3% month-on-month and 2.9% (2.8% prior) YoY. Assuming those levels are delivered, expect the market to continue pricing a Fed hike in December and the dollar to stay supported. One slight wrinkle for dollar bulls could be the core CPI release.
Given the rough make-up of the core basket (shelter 45%, services 25-30%, goods 20-25%), any signs today that the loss of disposable income was impacting consumer spending in other parts of the economy could rein in some of the more hawkish Fed tightening scenarios. And we know pressure on rents is weighing on the shelter component. Thus, a 0.2% instead of a 0.3% could be the risk on core CPI month-on-month today, which could see short-dated rates edge a little lower and the dollar soften.
But a hot PPI print tomorrow and next week's FOMC should keep the dollar bid on dips. And the view that the Fed will react to this inflation shock has been central to the dollar's recovery over the last month. US real interest rates (we look at two-year USD swap rates against the zero-coupon inflation swap) have risen 60bp over the last six weeks.
The rise in real rates has pressured last year's dollar debasement trade, which had assumed that a captured Fed would do the bidding of the White House. The rise in real rates has punished popular debasement trade targets such as gold, bitcoin and the Swiss franc. Keep an eye on key support levels in gold and bitcoin, such as $4100/oz and $60,000 for signs of more money leaving that trade and more money entering the dollar.
Sources & References
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