FX Daily: Dollar upside risks are rising rapidly
The desk views a robust upside potential for the U.S. dollar driven by escalating crude prices and tightening monetary policy from the Federal Reserve. Per the full note, a mix of geopolitical tensions, particularly developments in the Gulf region, and rising inflation persistence are rekindling speculations of a Fed rate hike. With market expectations currently pricing in a near 50% chance of a hike this month, the potential for further dollar strength is palpable. As the EUR/USD currently sits at 1.1434, the market is navigating trend changes amidst mixed ECB expectations and geopolitics.
What the desk is arguing
The desk believes that increasing crude oil prices alongside a hawkish Fed pivot will elevate the dollar. Per the full note, the dollar’s outlook is further buoyed by dwindling U.S. crude inventories that currently stand at their lowest since 1984, sparking inflation concerns that could necessitate an aggressive Fed response.
Currently, the rate differential is providing some support for the EUR/USD, but as oil prices rise, they might overshadow this support. The recent chatter among Fed officials also signals that a short-term rate hike may be on the table if core inflation remains stubborn, fostering a bullish environment for the dollar.
Where it sits in our coverage
The consensus target for EUR/USD is 1.1750, with a range from 1.1200 to 1.2000. Notably, forecasts from firms like deutschebank and goldman suggest targets of 1.2000 and 1.1800 respectively for December 2026.
The desk's perspective aligns closely at the lower end of this range, indicating a potentially more bearish outlook compared to some of the bullish sentiment expressed by other firms.
How other firms see it
Several firms, including jpmorgan and mufg, project sideways momentum for USD with targets close to 1.1800 for December 2026. Conversely, firms like citi suggest a more cautious approach with lower targets around the 1.1300 mark, indicating a divergence in sentiment.
The current trajectory of EUR/USD distinctly correlates with ECB rate path expectations amid fluctuating inflation indicators, hinting at further volatility driven by policy adjustments.
What the calendar says
With no high-impact events on the agenda in the coming month, traders will need to rely heavily on inflation data and Fed communications to assess the evolving landscape.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The dollar is poised for potential strength due to rising crude prices and inflation concerns.
- 02Speculation of a Fed rate hike has reached significant levels, nearly 50% for July.
- 03The current EUR/USD rate stands at 1.1434, amidst hawkish ECB and Fed signals.
- 04Geopolitical tensions in the Gulf and low U.S. crude inventories add further volatility.
Market implications
Focus on levels near 1.1400 for EUR/USD which could offer technical resistance. Monitor Fedspeak closely for signals on potential rate hikes that could add momentum to dollar strength.
Risks to this view
Should core inflation show signs of abatement or if geopolitical tensions ease considerably, this could undercut the dollar's strength and shift market sentiment back towards the euro.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Neutral | 1.1450 |
Citi | Bearish | 1.1000 |
MUFG | Bullish | 1.1800 |
Articles FX Daily: Dollar upside risks are rising rapidly Published 07:50 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Crude has jumped, but still isn’t fully pricing in a fully-fledged new supply shock, meaning short-term risks remain on the upside for the dollar. So far, the rate differential is keeping EUR/USD afloat thanks to hawkish repricing of ECB expectations alongside the Fed’s, but further energy price increases should overcome rates as a primary driver Francesco Pesole , Frantisek Taborsky and Chris Turner We have published our monthly update of FX views and forecasts: FX Talking – Dancing in the dark USD: Room to rally Short-term momentum is swinging back in favour of the dollar as the FX market is finally starting to take the Gulf re-escalation more seriously. Still, both oil (Brent is at $84/bl this morning) and the USD are showing reluctance to fully price back in another supply shock.
That's despite the US reimposing a blockade in the Strait of Hormuz and oil inventories at worryingly low levels. Overall US crude inventories (commercial+SPR) were 730.8m barrels as of 3 July, the lowest since 1984. This positive but contained USD reaction does seem a déjà vu of this spring.
But conditions are different now. Reduced Fed guidance after a hawkish shift in June means allowing markets to speculate more aggressively on Fed tightening. Markets are now pricing in a roughly 50% chance of a hike in July, and 43bp by year-end.
Fedspeak remains crucial at this stage: yesterday, Chris Waller warned a hike may be needed in the short term if core inflation stays hot. Chair Kevin Warsh starts his first House testimony today, but he may follow his low-guidance approach and give little away. Barr, Goolsbee, Cook and Bowman are all speaking today.
Today's US June CPI release shouldn't severely dent markets' hawkish tendency. Headline should fall month-on-month due to lower energy prices, but core at 0.2% MoM isn't enough to dispel concerns about second-round effects. Our call for the remainder of the year remains USD negative, primarily resting on another de-escalation and dovish Fed view.
But risks, especially in the near-term, are clearly shifting to the bullish side for the greenback, with 102.0 potentially being reached rapidly in DXY if the Hormuz blockade continues. Francesco Pesole EUR: Helped by rates The EUR:USD short-term rate differential is – for now – helping to keep EUR/USD afloat in this Gulf re-escalation. The two-year swap rate gap has re-tightened around 15bp since the start of July, primarily because the rebound in oil prices happened at a time when ECB hike bets were dwindling, leaving more upside room to recover for EUR front-end rates.
Sources & References
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