FX Daily: Fed pricing and tech indigestion bolster dollar
The dollar is gaining momentum, primarily driven by bullish Fed pricing and a backdrop of risk aversion triggered by a tech sector sell-off. Per the full note source, the market is currently pricing in nearly 30bp of Federal Reserve rate increases by the end of the year, alongside a warning of potential second-round inflation effects stemming from recent jobs data. This dynamic positions the dollar favorably, particularly ahead of the May CPI data release which is anticipated to show a YoY increase of over 4%.
What the desk is arguing
The desk posits that the combination of hawkish expectations from the Federal Reserve and heightened risk aversion is likely to sustain the dollar's strength in the near term. Per the full note source, the recent strong jobs report has bolstered market forecasts, leading to continued appetite for the dollar despite potential overvaluation risks in Fed tightening expectations.
Beyond the immediate impact of inflation data, we note that investors are also adjusting their portfolios in response to Fed signals, as seen in the tech sector's corrective moves which may influence broader market sentiment and USD positioning.
Where it sits in our coverage
Our internal consensus for EUR/USD stands at 1.1900 by December 2026, with a range of 1.1300 to 1.2000. Notable firm targets include ING at 1.2200 for December 2026 and Barclays at 1.2100, indicating a bullish sentiment aligned on the dollar's trajectory.
This perspective aligns with the broader market direction, as many firms are adjusting their forecasts in light of recent Fed communication and economic data, positioning the desk's view slightly above the central consensus.
How other firms see it
Several firms echo this bullish sentiment on the dollar, with Commerzbank and Goldman showing similar levels of confidence in future dollar strength. In contrast, a handful of firms like Citi are adopting a more cautious stance, with projections indicating potential weakening for the USD, viewing the current valuations may be nearing their peak.
As the Fed tightens, movements in USD/JPY could serve as an additional indicator of market sentiment towards the dollar, reflecting spillover effects from Fed decisions and risk-on/risk-off shifts in investor behavior.
How firms align with this view
Key takeaways
- 01The dollar is benefitting from hawkish Fed pricing and tech sector weakness.
- 0230bp of Fed tightening is being priced in for 2026, bolstered by recent jobs data.
- 03Investors are adjusting portfolios, leading to a potential spillover into broader market movements.
- 04CPI release expected to show an increase above 4% YoY, reinforcing dollar strength.
Market implications
Watch for the upcoming May inflation data on Wednesday, which could solidify or challenge current Fed tightening expectations. Additionally, observe how positioning in USD/JPY reacts to imminent Fed communications as this could impact broader market sentiment.
Risks to this view
The current dollar rally may be undermined if CPI data comes in lower than expected or if significant pushback emerges from Fed officials during the communication blackout period leading up to the 17 June FOMC meeting.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Bank of America | Bearish | 1.1200 |
ANZ | Bearish | 1.1400 |
UOB | Bullish | 1.1565 |
Articles FX Daily: Fed pricing and tech indigestion bolster dollar 07:48 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The dollar is enjoying broad support. Bearish flattening of the US yield curve as the market moves to price Fed tightening and a tech-led sell-off in risk assets are the main culprits for the move. We see these two factors continuing to dominate in a week that sees the release of US CPI for May on Wednesday and a likely SpaceX IPO on Friday Chris Turner , Frantisek Taborsky and Francesco Pesole Hawkish Fed pricing and a tech-led sell-off in risk assets should continue to keep the dollar supported USD: Fed pricing and risk-off mood to keep the dollar bid Friday saw one of the cleanest and broadest dollar advances in quite a while.
The core driver of the move was the strong US jobs report , which has raised expectations that this year's energy inflation shock is landing on fertile ground for second-round effects. The market is pricing close to 30bp of Federal Reserve tightening this year and 50bp of tightening by the second quarter of 2027. At some point, that expected tightening will be too aggressive, but we cannot see that story being unwound this week.
This is because it is another week for US price data, where the May headline CPI reading is expected to push through 4% year-on-year, and PPI final demand should remain near 6% YoY. We are now also in a Fed communication blackout period ahead of the 17 June FOMC meeting, meaning there is little to no scope for the Fed doves to push back against this pricing. In fact, we see the dollar staying bid into that FOMC meeting, given the market expects the central bank to remove its implicit easing bias.
At the same time, growing expectations of Fed tightening have caught an investor base overweight equities and overweight emerging markets. As we discussed in an article on Friday , it looks like investors might be selling off benchmark tech names to clear room in portfolios for Friday's $75-85bn SpaceX IPO. There could also be an issue of indigestion here as well, given that Alphabet recently tapped the equity market for $85bn, and OpenAI and Anthropic also plan to IPO in the coming months.
We see the Swedish krona and the Israeli shekel as the most tech-sensitive currencies in the G10 and EM spaces, respectively. An unwind of risk assets and especially an unwind of emerging market positions is normally dollar-positive. This probably adds weight to US Treasuries as well, given that emerging market nations (and presumably Japan again sometime) will be liquidating Treasuries for FX intervention operations.
One further source of dollar selling this week could come from Korea's National Pension Service. In exceptional times, it can increase its benchmark 15% hedge ratio on foreign assets and has said that it is doing so today. As of April, it held over $400bn of foreign equities and bonds – a big chunk of which is presumably in the US.
Sources & References
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