FX Daily: Dollar soft, US policy in spotlight
The desk sees the US dollar opening the week on a weak note, driven by market expectations surrounding upcoming US policy announcements. Per the full note from ing-think, the week presents significant events, including a speech from Treasury Secretary Scott Bessent on fiscal consolidation and fresh sanctions on Iran, both of which could exacerbate existing dollar weakness. Concurrently, there's a noted long-squeeze in USD positioning, reflecting traders' hesitancy to fully commit to bearish dollar bets just yet. In the context of our internal coverage, while the consensus views the dollar’s decline as potentially temporary, the looming policy decisions serve as key catalysts for market sentiment.
What the desk is arguing
The desk frames the current market condition as an opportunity for a continued weakening of the US dollar due to upcoming policy updates from the White House. With the dollar already near recent lows, any aggressive shifts in US trade policy or fiscal strategies are likely to amplify downward pressures. Per the full note, developments surrounding sanctions on Iran particularly intrigue, as they may have implications for US-China trade relations, which would further complicate the dollar's trajectory.
Supporting this view is the awareness of the USD's vulnerability, with the market showing interest in more pro-risk sentiment compared to previous periods. The long-squeeze dynamics suggest that while traders are cautious, there is significant room for further dollar weakness if bearish sentiment gains traction. Recent positioning shows a cautious yet critical state of market sentiment, indicating we have not yet seen the bottom for the dollar.
Where it sits in our coverage
Currently, the EUR/USD is trading around 1.1679, with a median consensus target of 1.1700 by March 2026. Notably, firms have spread targets for this pair ranging from 1.1200 to 1.2000, reflecting diverse market expectations: - anz: 1.1609 - morganstanley: 1.2000 - commerzbank: 1.1900 - goldman: 1.1800
This stance aligns closely with a broader consensus that observes gradual weakening in the dollar. Particularly, ubs and scotiabank also echo the sentiment that the dollar may face substantial headwinds moving forward.
How other firms see it
There is a split sentiment among market participants regarding the dollar's trajectory. Aligned firms such as morganstanley and commerzbank point towards dollar weakening aligned with risk-on attitudes, while contrary perspectives from citi and goldman suggest the potential for stability at certain levels. This divergence highlights broader uncertainty in future dollar movements.
Given these dynamics, monitoring the EUR/USD trajectory in conjunction with the ECB's stance and updates on US Treasury yields will be crucial as they intersect with upcoming fiscal signals and risk-integrating policies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The US dollar is currently experiencing weakness, opening the week close to recent lows.
- 02Market focus is on impending US policy news that could influence dollar movements, particularly related to fiscal consolidation and sanctions.
- 03The potential for a continued squeeze on long USD positions highlights market caution despite prevailing bearish sentiment.
- 04Consensus targets across major currency pairs reflect a hesitation to completely abandon bullish dollar scenarios.
Market implications
Traders should monitor the immediate impacts of Treasury Secretary Scott Bessent's policy announcements, particularly focused on sanctions regarding Iran, as they could create significant shifts in trading volumes. Additionally, keeping an eye on the EUR/USD as it nears consensus targets could signal further trends.
Risks to this view
A rapid escalation in US-China trade tensions, especially in the context of sanctioning Iran, could lead to sharp reversals in dollar strength. Conversely, any unexpected hawkish signals from the Federal Reserve may challenge this bearish outlook and support USD.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
ING | Neutral | 1.1700 |
Rabobank | Bullish | 1.1800 |
Articles FX Daily: Dollar soft, US policy in spotlight Published 05:50 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The dollar opens the week on a soft footing as the market awaits fresh policy updates from the White House. These include 'economic D-Day' for Iran and perhaps some kind of US fiscal consolidation plan promised after stress in the Treasury market last week. Most paths seem to lead to a weaker dollar, but Kevin Warsh's speech on Friday could prove supportive.
Chris Turner , Francesco Pesole and Frantisek Taborsky There may still be room for further USD long-squeezing, and we remain reluctant to call the bottom in this dollar selloff just yet USD: US economic policy in focus It has been a quiet start to the week in Asia, but the dollar remains near its recent lows. We made the point last week that we tend to favour a more pro-risk, benign dollar decline than some, but there are many in favour of sharper dollar losses on a return of the 'debasement' trade. That could be tested later today, with US Treasury Secretary, Scott Bessent, announcing a new set of sanctions on Iran.
With a new chapter in the US-Canada trade war opening up over the weekend, the question will be to what degree the new sanctions on Iran threaten US trade ties with China again, where China remains the largest buyer of Iran's energy imports. Given the febrile mood in the market and positioning, a big re-escalation in the tariff war is probably a dollar negative. The other big US policy announcement in focus is the prospect of fiscal consolidation dangled by Bessent last week.
Given Washington's firmly pro-growth mind-set, few expect any substantial spending cuts or tax rises, with the burden probably placed on efficiency gains. Clearly, the US Treasury market is not out of the woods yet and this week the focus will also be on Thursday's $44bn auction of seven-year Treasuries. Also, important this week are Wednesday's release of US core PCE inflation for July and Friday afternoon's keynote speech from Kevin Warsh at the Jackson Hole symposium.
While he is unlikely to shed much/any light on what the Fed will do with monetary policy next month, he will have to double-down on the Fed's inflation-fighting credentials - this after his July press conference triggered a sell-off at the long-end of the Treasury market. The speech could be a hawkish event risk for the dollar. DXY dollar index can probably see further consolidation in a 98.50-99.00 range today, with greater risk seen on the downside.
Chris Turner EUR: Positioning favours the euro Latest positioning data from the futures market in Chicago points to asset managers and leveraged funds buying euro contracts. The amounts are not particularly large and the data does predate last Wednesday's jump in EUR/USD, but this does serve as a reminder that speculators look quite underweight the euro. This was the same conclusion we drew when looking at the EUR/USD hedging data .
Sources & References
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