FX Daily: Dollar is on a roll
The desk reinforces the bullish sentiment on the dollar as the DXY dollar index approaches 101.80, bolstered by resilient US economic activity that continues to support Fed hawkishness. Per the full note from ing-think, recent softer-than-expected inflation data hasn't significantly altered market expectations for further rate hikes, as evidenced by a quick retracement in short-dated interest rates following the data release. With the upcoming US nonfarm payrolls and other key economic data, the backdrop remains constructive for dollar strength, particularly against the backdrop of weakening performance in EUR/USD.
What the desk is arguing
The desk posits that strong US economic fundamentals are continuing to drive dollar strength, with the DXY index nearing yearly highs. As noted in the source commentary, the Fed's tightening expectations remain firmly anchored despite recent inflation prints, suggesting an ongoing commitment to high interest rates.
Consumer spending reports, alongside positive signals from the ADP payroll growth data, reinforce the view that the Fed may need to explore additional tightening in the near term. This emerging strength contrasts sharply with the vulnerabilities observed in EUR/USD, which is testing lows and remains exposed to further declines.
Where it sits in our coverage
Our consensus target for EUR/USD stands at 1.1700, with a range from 1.1200 to 1.2000. Notably, firms such as socgen and credit suisse have set Dec-26 targets reflecting a bearish outlook for the euro, specifically at 1.1400 and 1.1700 respectively.
The desk's evaluation suggests a more bearish stance on EUR/USD compared to the broader consensus, falling towards the lower end of the prevailing projections. Observations from research articles point towards an anticipated divergence, where the fed's monetary stance appears stronger relative to ECB policies.
How other firms see it
Generally, firms like bofa and nomura align towards a bearish perspective on the USD/EUR spectrum, projecting lower targets for the euro across their forecasts. Counter to this, rbc and anz exhibit more optimistic targets for the euro, believing in potential upward movement relative to the current dollar strength.
This outlook emphasizes the interplay between US economic metrics and the stance taken by the European Central Bank, highlighting that shifts here could significantly impact the trajectory of EUR/USD. The focus remains on key economic indicators that can either fortify the dollar's momentum or challenge its ascent.
What the calendar says
While no imminent high-impact events are slated, all eyes remain on the upcoming nonfarm payroll release. This crucial data point is likely to shape expectations around Fed policy and could steer market movements, particularly concerning EUR/USD dynamics in light of this dollar strength narrative.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Resilient US economic data supports Fed hawkishness despite soft inflation reports.
- 02DXY dollar index nearing yearly highs illustrates strong demand for the dollar.
- 03EUR/USD is trending lower, facing vulnerability as Fed signals continue to dominate.
- 04Upcoming nonfarm payrolls will be crucial in determining Fed trajectory and dollar strength.
Market implications
Traders should closely monitor levels around 1.14 for EUR/USD as a potential breach could amplify dollar momentum. The impending nonfarm payroll release will act as a significant indicator; strong results may reinforce the bullish dollar stance, while weaker numbers could prompt reconsideration of recent dollar strength.
Risks to this view
A shift in sentiment towards softer US economic data, or unexpected dovish guidance from the Fed speakers, could destabilize the current bullish outlook for the dollar. Additionally, any significant negative surprises in upcoming initial claims or ISM manufacturing data could challenge the strength of the dollar.
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 is on a roll Published 07:40 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The dollar remains very well bid and the DXY dollar index is close to the highs of the year. Yesterday's softer-than-expected August US PCE inflation data barely put a dent in Fed tightening expectations, perhaps because US activity data continues to come in on the encouraging side. EUR/USD is testing the lows of the year and looks vulnerable Chris Turner , Frantisek Taborsky and Francesco Pesole The dollar is testing the highs of the year and could go higher USD: Activity data backs up the Fed's hawkish position The DXY dollar index is testing the highs of the year at 101.80.
Dollar debasement fears have been set aside for now as the cyclical story takes centre stage. Here the US economy is performing reasonably well and the market prices the need for the Fed to take policy into restrictive territory. Even a seemingly more docile US PCE inflation print for August , released yesterday, did not depress short-dated US interest rates for long.
For example, the one-month USD OIS rate priced one year forward briefly came off 5bp on the data release, but had retraced the entirety of that dip by the end of the US session. Firming up the view that the Fed will need to tighten again has been the activity side, where consumer spending data is holding up and there are even signs that payroll growth is accelerating again – this from the monthly ADP report released yesterday. All eyes will once again be on tomorrow's September nonfarm payrolls release.
Today, the US focus will be on the weekly initial claims data and the ISM manufacturing data. The sense is that the AI investment boom is seeping into broader parts of the US economy and a healthy 55 headline reading is expected for the index, alongside firm prices paid, new orders and employment figures. Also on the calendar are a raft of Fed speakers.
The only Fed voters speaking today are Neel Kashkari (1330CET) and Chris Waller (1600CET). Kashkari is now a noted hawk, but Waller's remarks should be more interesting should he stray away from today's subject of Fed economic data and into the realms of monetary policy. Barring some breakthrough in US-Iran negotiations, it looks like the dollar will stay bid in October.
For reference, DXY has appreciated in seven of the last 10 Octobers. Expect DXY to remain bid in a 101.50-101.80 range today, but an upside breakout is a possibility should tomorrow's US data surprise on the upside or should the sell-off in European government debt start to heavily weigh on the euro (see below). Chris Turner GBP: The Burnham bounce?
Sources & References
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