FX Daily: Dollar finally catching up with its drivers
The desk highlights a noticeable uptick in the dollar's performance as it aligns with several positive short-term drivers, including robust front-end rates, escalating energy prices, and diminished risk appetite. Per the full note , the DXY index experienced its strongest session since the Jackson Hole speech, a testament to these supportive macroeconomic indicators. Currently, the market's attention is likely focused on the Fed's impending FOMC announcement, which may heighten volatility for the dollar in the short term, particularly if any signs of rate hikes are reinforced. Our current assessment of the USD position is also informed by the latest trend in Treasury yields, which pushed the 10-year rate to 5.0%, maintaining a tolerable premium over the estimates for neutral rates.
What the desk is arguing
The desk frames this as an opportunity for dollar appreciation following its recent alignment with supportive fundamentals. Key factors such as elevated front-end rates, climbing oil prices, and softening risk sentiment appear to be catalyzing this rally, positioning the dollar favorably ahead of critical economic announcements.
Recent trading behavior has reinforced this stance, underscored by USD/JPY movements. The pair reached a level around 155.0, with potential upside to 156-157, signaling strong bullish momentum.
Where it sits in our coverage
In terms of our internal coverage, the current spot for USD/JPY is 161.2860, with a consensus forecast suggesting a median target of 152.0 by December 2026. Significant projections also include targets from socgen at 155.0, morganstanley at 150.0, and rbc at 156.0.
This aligns well with the overall market consensus as the desk's outlook is within the upper end of the projected range, reflecting a bullish sentiment that is echoed across various firms’ analyses.
How other firms see it
Majority views among firms like morganstanley signal a degree of alignment with the dollar's appreciation trajectory, while those from socgen take a more cautious stance, observing potential headwinds against further dollar strength.
Watch the trajectory of EUR/USD, particularly in relation to ECB decisions regarding rate paths, which can influence dollar demand significantly through relative interest rate dynamics. The performance of GBP/USD is also pertinent, given its ongoing relationship with Fed policies and expectations from the BoE.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The dollar's recent gains are supported by rising front-end rates and higher energy prices.
- 02USD/JPY is experiencing strong bullish momentum, reaching levels not seen since Jackson Hole.
- 03Market sentiment ahead of the upcoming FOMC meeting could introduce volatility for the dollar.
- 04The dollar remains sensitive to Treasury yield movements, which have reached a critical threshold.
Market implications
Traders should monitor the 155.0 level in USD/JPY closely, as a sustained breach above this mark may propel the pair towards 156-157. The upcoming FOMC meeting on Wednesday is crucial, as it could dictate market sentiment and influence further dollar movement.
Risks to this view
Any positive developments in the Gulf region or signs of easing risk aversion could severely undermine the consolidation of the dollar, potentially reversing the prevailing bullish sentiment and leading to increased volatility in USD pairs.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
BNP Paribas | Bearish | 1.1500 |
UBS | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
Articles FX Daily: Dollar finally catching up with its drivers Published 07:40 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The dollar had a strong start to the week, finally realigning with a set of supportive short-term drivers: front-end rates, higher energy prices and soft risk sentiment. We could see some stabilisation ahead of tomorrow’s key FOMC announcement, but risks remain on the upside for USD. Elsewhere, we have little faith in this GBP outperformance Frantisek Taborsky , Francesco Pesole and Chris Turner The dollar is having a strong start to the week USD: Finding strength US 10-year yields touched 5.0% yesterday.
As our rates team discussed here , that’s no reason to panic: 5% is a tolerable 50bp premium over the upper bound of our estimate for the neutral 10y rates (4.0-4.5%). The relevant question for FX is whether that represents a pain threshold for the Treasury. Markets were disappointed with the $6bn buyback operation, meaning any new intervention has a clear higher bar.
Remember, larger unscheduled buybacks should be dollar-negative regardless of their effectiveness in capping yields. For now, Scott Bessent may be willing to let a largely oil-fuelled bond rout run its course, perhaps counting on Wednesday’s likely Fed hike to at least keep inflation expectations from breaking loose. Yesterday, the dollar finally caught up with the tailwinds we’ve highlighted over the past couple of weeks: supported front-end rates, high oil prices, and a soft risk environment.
Yesterday was DXY’s strongest session since the day of Warsh’s Jackson Hole speech. What’s surely helping the index is the yen losing much of its idiosyncratic push. USD/JPY was briefly back at 155.0, and as we discussed yesterday , we think upside risks extend to 156-157 in the near term.
The most realistic driver of a USD correction today is any positive development in the Gulf. The latest headlines on reduced Saudi output and delayed negotiations have continued to support Brent at around $107/bbl. The dollar may stay in tighter ranges until the FOMC delivers its verdict tomorrow evening: today’s calendar includes only the Empire Manufacturing and weekly ADP payroll figures.
Still, the broader backdrop keeps the odds in favour of further dollar gains, in our view. DXY at 100.0 remains a credible near-term target. Francesco Pesole EUR: 1.150 in sight This morning’s ZEW in Germany is expected to keep improving.
Consensus is looking at a jump from 34 to 40 in the expectations gauge and from -61 to -52 in the current situation one. That’s effectively the only data release with any market-impact potential this week – unless final August CPI prints show large revisions. Anyway, the echo of last week’s hawkish ECB hike remains a more relevant driver for any euro resilience at this stage.
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