FX Daily: Dollar rally needs more risk-off fuel
The desk is positioning for a tempered dollar rally, suggesting that current strength hinges on sustained risk-off sentiment. Per the full note from ing-think, while the dollar has strengthened following last Thursday’s tech-led sell-off and strong US jobs data, the potential for correction looms unless negative market sentiment continues. Despite the recent uptick, with the dollar's DXY index moving upward, we caution that a softening in short-term US rates could push the dollar lower if risk appetite returns.
What the desk is arguing
The desk frames this as a cautious outlook for the dollar rally, which may already appear overstretched. Support for this perspective arises from the fresh US jobs report, which revealed a surprising 165,000 payroll addition, enhancing the dollar's appeal. However, scrutiny remains on broader market sentiments and defensive stock movements, which need to persist for further dollar strength to materialize.
Furthermore, recent dollar gains have not been echoed across all currency pairs, particularly affecting higher-beta G10 currencies like the Australian dollar and Swedish krona, which have seen notable declines. This suggests that unless a continued risk-off trajectory keeps pressure on the higher-beta currencies, corrective moves in the dollar could emerge sooner rather than later.
Where it sits in our coverage
Our consensus target for EUR/USD currently stands at 1.1373, with a median range of 1.1162 to 1.2000 across various firms. Notable targets for Dec-26 include: - rbc: 1.2000 - mizuho: 1.1600 - hsbc: 1.1000
The desk's cautious stance aligns well within this multitude of forecasts, particularly noting that some major firms are positioning towards the upper range of the consensus, capturing the potential for a bullish EUR/USD move, while a few, including nomura, expect a further strengthening of the euro.
How other firms see it
Aligned firms remain cautiously optimistic, looking for the dollar to stabilize but acknowledging potential volatility based on risk sentiment shifts, while some contrary firms foresee a dollar decline against the euro over the coming months. Notably, we highlight the perspectives of bofa and scotiabank, who expect movements contrary to the desk’s outlook.
The outlook for EUR/USD will be closely tied to US CPI metrics and the imminent shifts in broader monetary policy, especially as markets watch for any rhetoric from central banks regarding inflation management strategies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The dollar's recent strength depends heavily on maintained risk-off sentiment.
- 02US jobs numbers have boosted the dollar, but short-term rate dynamics could lead to losses.
- 03Caution is warranted as many high-beta currencies are declining alongside the dollar's rise.
- 04DXY index corrections are plausible if risk sentiment shifts toward recovery.
Market implications
Traders should focus on the DXY index's ability to hold above recent highs and monitor for sentiment shifts, particularly with key US CPI data releasing soon. A failure to maintain these gains could signal a shift for EUR/USD potentially moving toward the upper consensus targets.
Risks to this view
The main risk to the desk's outlook lies in a rapid recovery of risk appetite, particularly in equity markets that could undermine dollar gains. Additionally, any surprisingly low US inflation data may lead to rapid adjustments in market expectations around the Federal Reserve's interest rate path, driving the dollar lower.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UniCredit | Bullish | 1.1600 |
Rabobank | Bearish | 1.1000 |
ING | Bullish | 1.1300 |
Articles FX Daily: Dollar rally needs more risk-off fuel Published 07:56 FX Translate Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Contagion from AI to defensive stocks in the US and worldwide allowed the dollar to rally even before the strong US jobs market report. But unless risk sentiment remains poor this week, lower front-end US rates should favour a weaker dollar, even if inflation tomorrow comes in slightly hotter than expected Francesco Pesole , Frantisek Taborsky and Chris Turner We think the dollar rally looks a bit stretched USD: At risk of correction The dollar has emerged stronger after markets digested last Thursday's big tech-led equity selloff. The greenback was already gaining ground across the board even before US payrolls (165k) smashed expectations on Friday afternoon.
The dollar's appreciation was probably driven, albeit with some delay, by the extent of the contagion into defensive stocks and global markets. Still, the pass-through from the equity shake-off to FX volatility has been rather contained, and broadly concentrated in higher-beta G10 currencies. The Australian dollar, Swedish krona and Norwegian krone have dropped around as much as the heavily AI-exposed Korean won since last Wednesday's close.
Scrutiny of the AI trade will inevitably remain very elevated this week. Markets are still assessing the actual implications of the Democratic sweep of Congress for regulatory risks around the AI-capex cycle, and whether this is effectively the start of a bigger downturn for tech stocks. We think the dollar rally requires the risk-off mood to persist this week.
Otherwise, there is some moderate correction risk, as Friday’s move looked a bit too stretched relative to short-term market drivers. Still, in our view, the macro story should prevent DXY from returning to last week’s lows of 101.1. We expect tomorrow’s October US CPI to come in at 0.3% month-on-month for both headline (consensus 0.3%) and core (0.3%).
That should help cement expectations for a December Fed hike (19bp priced in), making the swap curve more protected from other equity market shocks. Oil remains the other variable to watch. Brent has stabilised just below $100/bl, retaining some geopolitical risk amid timid progress on peace negotiations in the Gulf and a lack of clarity around the implications of US and Israeli political developments.
In Israel, opposition candidate Gadi Eisenkot, who has supported a more diplomatic approach towards Iran than Prime Minister Benjamin Netanyahu, has been given the mandate to form a government. He has six weeks to form a coalition, and failure to do so is likely to result in Netanyahu receiving the mandate again. Francesco Pesole EUR: Cheap, focus on ECB succession The drop in EUR/USD looks too sharp relative to its short-term rate differential.
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