FX Daily: Energy and long bonds remain points of attention
The desk posits that the recent uptick in energy prices and long-dated bond yields may provide temporary support for the US dollar, making a significant retreat more challenging. Per the full note, the DXY dollar index experienced a rebound from recent lows at 99.40, reflecting market sentiment that looks favorably on the USD amidst conditions that hint at potential Fed tightening. Moreover, any further rise in energy costs and yields could renew speculation surrounding a rate hike in September, suggesting a pivotal moment ahead for dollar positioning.
What the desk is arguing
The desk discerns that higher energy prices combined with increasing long-duration Treasury yields are acting as supportive forces for the dollar, complicating any immediate bearish outlook. According to insights from key analysts, both factors could maintain pressure on the dollar as the market navigates tight monetary policy considerations from the Federal Reserve.
Particularly, the recent commentary cites the impact of geopolitical tensions, especially regarding Iran, which are pushing energy prices higher. Additionally, the rise in 30-year Treasury yields, propelled by substantial investment-grade bond issuance, points to a demand shift that may influence broader currency dynamics.
Where it sits in our coverage
For EUR/USD, our current consensus target stands at 1.16, with a range from 1.12 to 1.20. Notably, several firms project similar expectations for December 2026, including jpmorgan at 1.13, commerzbank at 1.22, and goldman at 1.12.
The desk’s perspective sees the dollar holding gains against the backdrop of market expectations for Fed action, aligning closely with ing which outlines targets around 1.17 through 1.18 for March 2026. This positioning suggests that there is a consensus on potential dollar strength ahead, particularly as pressure points begin to develop around energy and fiscal considerations.
How other firms see it
Among aligned firms, morganstanley and commerzbank also forecast higher targets for EUR/USD, indicating a shared sentiment for a stronger dollar narrative. In contrast, bofa and rabobank foresee less optimism, presenting lower estimates for the currency pair going into March 2026.
The dynamics here resonate with the dollar's interaction with Fed policy trajectories, potentially affecting the EUR/USD as well as GBP/USD, especially as speculation mounts over upcoming rate decisions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Higher energy prices and long bond yields provide support for the dollar.
- 02The DXY index rebounded from range lows, signaling robust market confidence.
- 03Speculation over an upcoming rate hike in September is likely to affect positioning.
- 04Consensus targets for EUR/USD project a range around 1.16 into late 2026.
Market implications
Traders should monitor the key resistance around 99.40 for the DXY, as significant movement beyond this level could strengthen the case for a dollar rally. Observing energy price trends in the short term will be critical, given their direct influence on Fed policy speculation.
Risks to this view
A sudden geopolitical improvement that leads to falling energy prices or significantly lower long bond yields could quickly shift sentiment against the dollar, invalidating the current bullish outlook. Additionally, any unexpected dovish signals from the Federal Reserve would dampen the dollar's upward momentum.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Société Générale | Bearish | 1.1400 |
Scotiabank | Bearish | 1.1200 |
Commerzbank | Bullish | 1.2200 |
Articles FX Daily: Energy and long bonds remain points of attention Published 06:32 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download In an otherwise reasonably benign environment, the drift higher in energy prices and longer-dated bond yields are proving points of attention. Both are mildly dollar-supportive in that they make it difficult to completely dismiss the chances of tighter Fed policy. Having bounced back from range lows yesterday, the dollar can hold gains in the near term Chris Turner , Francesco Pesole and Frantisek Taborsky Higher energy prices and long bond yields are providing the dollar with some support USD: Too soon to be chasing the dollar lower The DXY dollar index rebounded from the range lows at 99.40 yesterday, showing that the dollar is not quite ready to make a sustained break lower just yet.
The two factors providing near-term support are higher energy prices and rising 30-year Treasury yields. Both of these, should they extend, could put a September hike from the Federal Reserve back on the agenda. On the former, news that Washington seemingly has little interest in extending the 60-day ceasefire with Iran has seen oil and gas prices creep higher again.
In which direction the next big leg for energy prices emerges is anyone's guess. But higher energy is a dollar positive – both through US energy independence and the Fed's reaction function. Regarding long-end yields, ING's Rates Strategy team discusses the market here .
The fact that 30-year US Treasury swap spreads have not widened suggests that it isn't fiscal concerns driving the move. More compelling is the heavy investment-grade issuance from the US hyper-scalers. Here, US IG issuance has just hit a new record for August at $145bn.
A big sell-off in the long-end of the Treasury market is typically bad news for emerging market currencies and risk in general. We are not quite at that point yet, but a further rise in yields may increase the pressure on the Fed to act, and this week has seen the pricing of a September Fed hike rise to 9bp from 7bp. Today's US focus is on July PPI, weekly ADP jobs data, industrial production and housing data.
PPI data is probably the most important of this second-tier data, where any upside surprise could lift short-dated US rates and the dollar. Expect DXY to remain more supported in a 99.40-100.00 trading range. Chris Turner EUR: Contained Yesterday's EUR/USD rally stalled shortly above 1.16, and investors will be reluctant to push it much higher given energy price developments and ahead of the FOMC minutes tomorrow night.
Despite recent positive economic surprises in the eurozone, the fact that natural gas prices are close to their highs for the year merits some caution. On the calendar today should be some mildly encouraging ZEW investor survey expectations and a speech by ECB Chief Economist Philip Lane. Higher energy prices are firming up expectations of a 25bp hike from the European Central Bank in September and keeping views alive of another 25bp hike by early next year.
Sources & References
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