FX Daily: Dollar’s turn to get a monetary policy lift
The desk argues that the US dollar is positioned for a supportive lift from anticipated monetary policy changes ahead, driven predominantly by a likely 25bps hike from the Federal Reserve. Per the full note, the latest CPI data points to a robust inflationary backdrop, reinforcing market expectations of continued hawkishness from the Fed. The current spot for EUR/USD is 1.1446, while recent insights show that the consensus target for March 2026 across firms hovers around 1.1700. Traders should watch for signals on broader risk sentiment, especially amid rising oil prices impacted by geopolitical tensions.
What the desk is arguing
The dollar appears poised for a favorable shift as the Federal Reserve gears up for a potential interest rate hike this week. The desk notes that the recent uptick in domestic inflation, with CPI readings exceeding expectations, solidifies a widely anticipated 25bps increase in rates. This expectation is also reflected in market pricing, which suggests around 22bps have already been discounted ahead of the decision.
Support for the dollar also draws from external factors including rising oil prices due to geopolitical concerns, particularly following Saudi Arabia's pipeline issues, which underscore fragility in risk sentiment. Thus, expectations for a hawkish tone from the Fed could have dual benefits of lifting the dollar and reinforcing a positive USD-Treasury yield correlation.
Where it sits in our coverage
The current consensus for EUR/USD stands at 1.1700 for March 2026, with individual targets varying among firms: - socgen: 1.1700 - morganstanley: 1.2000 - rbc: 1.1600
The desk's expectation of a stronger dollar aligns closely with this consensus, finding itself towards the upper range of expectations, considering the median target set by firms in our coverage.
How other firms see it
Firms such as socgen and morganstanley are aligned with the bullish outlook for the dollar, whereas firms like danskebank express a more cautious stance regarding the Euro. This divergence highlights differing perceptions of future central bank policies and risk dynamics during this pivotal week.
The anticipated Fed meeting directly impacts both the EUR/USD trajectory and the broader USD/JPY outlook, where a synchronized hawkish narrative from the Fed could exert pressure on yields and strengthen the dollar across these pairs.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Expectations for a 25bps hike from the Fed could support the dollar's strength.
- 02Recent inflation data underpins market views of continuous Fed hawkishness.
- 03Geopolitical factors and rising oil prices may heighten risk aversion, favoring the dollar.
- 04Current EUR/USD consensus target sits at 1.1700, indicating market optimism around the dollar.
Market implications
Traders should monitor the Fed's messaging for clues on future policy direction. A confirmation of a rate hike could set expectations for further dollar appreciation, particularly if accompanied by a hawkish tone. The spot at 1.1446 is critical as movements around this level could indicate shifts in positioning ahead of the announcement.
Risks to this view
A reversal of the current bullish outlook could occur if the Fed surprises markets with a more dovish tone or if inflation indicators show signs of cooling, undermining the case for a rate hike. Additionally, any sudden improvement in global risk appetite could mitigate demand for the dollar.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UBS | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
Société Générale | Bearish | 1.1400 |
Articles FX Daily: Dollar’s turn to get a monetary policy lift Published 07:54 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download After the ECB’s hawkish tone helped the euro last week, we think the same can happen with the Fed and the dollar, as rates are likely to be raised by 25bp on Wednesday and the tone may stay hawkish. Gulf developments remain concerning, and some AI-related headlines are further weighing on equities – an environment where the dollar should remain supported Francesco Pesole and Frantisek Taborsky We see upside risks for the US dollar this week USD: External and domestic drivers positive for USD The dollar has opened the week on a strong note, catching up with a combination of supportive domestic and external developments. Domestically, last week’s hotter-than-expected CPI print has all but sealed a Federal Reserve rate hike on Wednesday (preview here ).
Consensus is nearly unanimous, and markets are pricing 22bp. That may suggest limited USD upside on the day, but the currency still has room to catch up with higher front-end rates, while the Fed may retain a hawkish tone given the bond market’s demand for policy credibility and recent rise in energy prices. Externally, oil prices are rising again today after Saudi Arabia shut the East-West pipeline following drone attacks from Iraq.
The pipeline is a critical alternative to the Strait of Hormuz for roughly 7m bbl/day of exports. At the same time, Oman-led talks with Iran and other Gulf states on a temporary shipping route through the Strait have been postponed. Against that backdrop, risk sentiment should remain fragile, with calls from prominent tech figures to slow AI development adding pressure to already dwindling equities.
We continue to favour a moderately stronger dollar from here. A message of monetary policy rigour by the Fed on Wednesday can help slowly rebuild the positive USD-Treasury yield correlation, allowing the greenback to function more efficiently as a safe haven. A return to the 99.50-100.0 in DXY remains a tangible possibility in our view, and fully in line with current drivers.
One risk to that view is US President Donald Trump’s pledge to send $5k to every American should Republicans win Congress in the midterms. Markets remain sceptical about the proposal, both because of the legislative hurdles and because Democrats maintain a comfortable House lead in polls and prediction markets. Even so, the pledge may signal a willingness to deploy fiscal measures ahead of the vote despite persistent concerns about debt sustainability.
Any indication that similar measures are being taken seriously could trigger a rise in the USD risk premium. Francesco Pesole EUR: Eyes on ZEW and Lagarde today EUR/USD finally broke below 1.1600 yesterday, and we continue to favour further downside in line with our constructive USD view. That said, last week’s hawkish European Central Bank messaging may slow the pace of the decline.
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