FX Daily: Energy and carry dominate near term
In the current FX landscape, the dollar is gaining strength as rising energy prices and geopolitical tensions in the Gulf heighten demand for the greenback across low-yielding currencies such as the euro. Per the full note, the desk notes that higher natural gas prices are particularly troubling for Europe, where inventories are low. This scenario is expected to keep Fed tightening fears alive, thereby supporting the dollar against its peers. Consensus expectations are influenced by anticipated core inflation data, with the upcoming CPI print and Fed chair Kevin Warsh's testimony likely to provide further market direction.
What the desk is arguing
The desk argues that the strengthening dollar is driven by escalating energy prices and geopolitical uncertainties, particularly surrounding energy supplies from the Gulf region. Per the full note, concerns about natural gas prices in Europe, coupled with a lack of clarity from the Federal Reserve, will create ongoing demand for the dollar against lower-yielding counterparts.
Support for this assertion comes from the anticipation of inflationary pressures that could prompt the Fed to pursue further tightening measures. The expectation is that tighter monetary policy will not only stem from rising domestic inflation rates but also resonate across the G10 currencies, compelling a look at energy prices as a critical factor.
Where it sits in our coverage
For the EUR/USD pair, our internal consensus target stands at 1.1700, with a range from 1.1200 to 1.2000. Notably, citi is projecting a March 2026 target of 1.1300 while goldman sees it at 1.1800 for the same period. The desk's view positions the dollar outlook in line with the lower bound of expectations in the marketplace, suggesting widespread concerns surrounding European economic resilience.
How other firms see it
On one hand, firms such as goldman and mufg share a more bullish outlook on the euro, aiming for higher targets as the market considers potential stabilization in European energy supplies. Conversely, citi and scotiabank anticipate a weaker euro in response to persistent dollar strength driven by energy dynamics.
With respect to the JPY and CHF, the divergence between the USD and other low-yielding currencies could further signify the strategic positioning of traders amidst a complicated macro backdrop, driven principally by energy-facing inflation and geopolitical tensions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Dollar remains strong amid rising energy prices and geopolitical tensions.
- 02European vulnerabilities, particularly in energy, keep the euro under pressure.
- 03Upcoming U.S. inflation data and Fed testimonies could further influence market movements.
- 04Cross-market divergence is apparent, particularly with JPY and CHF in reaction to dollar strength.
Market implications
Traders should monitor the upcoming CPI data and Fed Chair Kevin Warsh's testimony closely, as they carry implications for future rate hikes and market sentiments surrounding inflation. A decisive movement below EUR/USD 1.1400 could indicate further dollar strength, reinforcing current bullish positions.
Risks to this view
Any sign of stabilization in Europe’s energy crisis or a marked decline in inflation pressures could lead to a shift, potentially eroding the dollar's current advantage and prompting a reevaluation of positions against low-yielding currencies.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Morgan Stanley | Bullish | 1.2150 |
UOB | Bullish | 1.1800 |
ING | Bullish | 1.1700 |
All 30 desk targets for EUR/USD
Articles FX Daily: Energy and carry dominate near term Published 07:54 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The deteriorating situation in the Gulf and the rise in energy prices are supporting the dollar against the low-yielders, including the euro. Worryingly for Europe, natural gas prices are creeping higher again at a time of low inventories. In the absence of direction from the Fed, higher energy prices will keep tightening fears alive and the dollar in demand Chris Turner , Frantisek Taborsky and Francesco Pesole Higher energy prices will keep Fed tightening fears alive and the dollar in demand USD: Higher energy keeps Fed tightening alive Lower FX volatility and the simmering conflict in the Gulf are the two dominant themes driving FX markets right now.
The former drives strong demand for high-yielding FX, and the latter drives demand for oil-exporting FX. The Colombian peso ticks both of those boxes and is performing well at the moment. But niche emerging market plays do have their pitfalls, as those holding the Kazakh tenge have found out over the weekend .
In the G10 space, the dollar is holding up well, and the macro story should keep it supported. US energy independence will come back to the fore if Iran is effective in re-closing the Strait of Hormuz. And this time around, US rates should rise along with overseas rates given that prospects of Fed tightening are now live.
On that subject, we get some important Fed data and speakers this week. Tomorrow sees the June CPI, where headline inflation is set to drop month-on-month. But with energy prices rising again and core inflation probably rising at 2.8/2.9% year-on-year, it looks too early for the market to price out a Fed rate hike this year.
Tomorrow also sees new Fed Chair Kevin Warsh start his two-day testimony to Congress. No doubt he'll make great efforts to share as few insights as possible, but there will be plenty more input into the Fed equation this week, including producer and import prices, retail sales and, on Wednesday, the release of the Fed's Beige Book ahead of the FOMC meeting on 29 July. With energy prices turning bid again and no signs of an imminent slowdown in US activity to take the sting out of higher prices (keeping Fed tightening prospects alive), the dollar should hold onto its gains.
Expect it to be favoured against low-yielding energy importers such as the euro and the yen. And in a world of higher interest rates, the Swiss franc lags. USD/CHF can retest last month's high at 0.8140, while DXY can grind to 101.50.
Chris Turner EUR: Natural gas story is worrying The pick-up in energy prices has put a lid on last week's corrective rally in EUR/USD. We also note that natural gas prices are on the rise, and our Head of Commodities Strategy, Warren Patterson, warns that European gas inventories are low at a time of a local heatwave. EUR/USD can easily drift down to the 1.1360 area and could test the 1.1300/25 area this month – even though we suspect that could prove the trading range low this summer.
It is not a big week for European data and short-dated euro swap rates look more likely to be dragged around by energy prices than ECB-speak. Of interest, ECB President Christine Lagarde meets Kevin Warsh in Washington today, although it seems highly unlikely that any insights from the meeting will be shared. Chris Turner JPY: Intervention prospects this week USD/JPY is grinding higher again – as is USD/Asia in general – on the back of higher energy prices.
Local authorities continue to try and defend against currency weakness – weakness which would add to the inflation problem. USD/JPY is back above 162 again and looks biased to retest recent highs near 162.70/85. In terms of a Japanese intervention strategy, the timing of the FX intervention seen in late April/early May this year was a carbon copy of 2024.
And back in 2024, with USD/JPY still bid, Japanese authorities intervened again in July ahead of the Marine Day public holiday. That same playbook would point to potential intervention this Thursday/Friday ahead of the public holiday next Monday. Of course, intervention alone cannot reverse the current bull trend.
For that to happen, energy prices need to come lower and the Fed must conclude that it does not need to hike rates after all. Both of those seem unlikely in the near term. Chris Turner CEE: Dovish NBP to weigh on zloty as koruna and forint stay supported Moving into the second half of the month, the CEE news flow turns to secondary data this week.
The Polish June CPI should be confirmed at 2.5% on Wednesday, helped by unexpectedly low food prices and normalising fuel costs, while Thursday’s core print is likely to stay unchanged at 3.1%. Headline inflation may edge higher in July after lower excise duty and VAT on fuels expired and gasoline prices rose again. Even so, the medium-term inflation outlook remains favourable, which should allow the central bank to keep rates on hold in the coming months.
Hungary wages on Thursday and Czech PPI on Friday may further refine the monetary policy picture. Thursday’s National Bank of Poland press conference struck a clearly dovish tone, which should weigh on the zloty for a bit longer. The market is pricing almost a full rate cut further out, with more than a 50% probability assigned to the September meeting.
Rates are still searching for a new equilibrium, but the rate differential in our models points closer to 4.340 in EUR/PLN, with upside risk. Despite the sharp weakening in recent days, we remain bearish on PLN this week and beyond. Weekend headlines from the Middle East point to a risk-off opening today, which should add pressure across the region.
We remain bullish on the koruna, backed by a hawkish Czech National Bank, and on the forint, which is recovering from the global sell-off amid a still solid domestic backdrop – but near-term weakness across CEE FX looks likely. Frantisek Taborsky Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Authors Chris Turner Global Head of Markets and Regional Head of Research for UK & CEE Chris is Global Head of Markets and Regional Head of Research for UK & CEE. Together with his team, he provides short and medium-term FX recommendations for ING's corporate and… Frantisek Taborsky EMEA FX & FI Strategist Frantisek is an FX & FI Strategist covering EMEA markets, having joined the bank in 2022. He provides short- and medium-term recommendations for ING's corporate and institutional client… Francesco Pesole FX Strategist Francesco is an FX Strategist and has been with the firm since May 2019.
His main focus is on the G10 space and, in particular, on European and commodity currencies. He began his career at Credit… In this article USD: Higher energy keeps Fed tightening alive EUR: Natural gas story is worrying JPY: Intervention prospects this week CEE: Dovish NBP to weigh on zloty as koruna and forint stay supported
Sources & References
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Cross-firm research
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