FX Daily: High bar for a dollar correction
The desk suggests that the dollar's downtrends are likely transient, as underlined by persistent hawkishness from the Fed and fragile bond markets. Per the full note from ING, current economic indicators signal limited potential for a drastic dollar correction, with Treasuries reflecting a temporary pause in bearish activity. The desk retains a moderately bullish outlook for the dollar in the near term, bolstered by this underlying environment and expectations for a rate hike in December. Meanwhile, the widening spread in forecasts for currencies like the EUR/USD, currently at 1.1253, reflects varied sentiment among firms regarding the euro's potential resilience against the dollar.
What the desk is arguing
The desk maintains that the conditions for a significant dollar correction appear challenging, particularly as the Fed's hawkish communications instill confidence in future rate hikes. This perspective is consistent with findings from the source commentary, which highlights that a combination of fragile market sentiment and inflation expectations contribute to sustained support for the dollar.
Recent data trends, like inflation expectations hinted by the University of Michigan surveys and potential Fed commentary, suggest that the dollar could continue to find footing. For instance, the commentary notes that the dollar's recent declines are expected to remain shallow, particularly with solid support from U.S. Treasuries.
Where it sits in our coverage
Our consensus target for EUR/USD stands at 1.1700, with a range between 1.1200 to 1.2000. Notably, rabobank has a Dec-26 target of 1.1800, while bofa is more conservative at 1.1500.
The desk's view aligns closely with the prevailing consensus, particularly at the upper bounds of projections from firms like socgen at 1.2000 and cibc at 1.2200. This positioning underscores a relatively optimistic outlook for the dollar despite its recent ebbs.
How other firms see it
Aligned firms generally echo the desk's perspective, with expectations leaning towards a moderately stronger dollar. The outlook from firms such as rabobank and mizuho shows agreement on potential bullishness for the dollar.
Conversely, contrary views exist among firms like hsbc, which show a much more subdued view on dollar strength particularly in relation to the JPY, where they target much lower levels ahead. The upcoming University of Michigan sentiment release will also likely impact perceptions in USD/EUR and consequently the market narrative regarding a tighter Fed stance.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The dollar is expected to face only limited downward pressure despite recent fluctuations.
- 02A hawkish Fed narrative persists, suggesting a December rate hike is on the horizon.
- 03Market sentiment remains fragile, particularly within the bond market.
- 04EUR/USD projections widely diverge across firms, indicating uncertainty about the euro's performance.
Market implications
Focus on how near-term data, especially from the University of Michigan, may influence dollar valuations, particularly against the EUR/USD level of 1.1253. A sustained dollar improvement could be underscored if inflation expectations indeed rise.
Risks to this view
A sharp pivot from the Fed towards a more dovish stance or unexpected macroeconomic weakness in the U.S. could significantly undermine dollar strength. Additionally, geopolitical developments or stabilization in bond markets could also challenge the current bullish outlook.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Bank of America | Bullish | 1.1500 |
Rabobank | Bullish | 1.1800 |
Citi | Bearish | 1.0850 |
Articles FX Daily: High bar for a dollar correction Published 07:40 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Dollar drops may continue to prove short-lived and quite small in size as bond markets remain fragile and the Fed narrative hawkish. French premium isn’t likely to leave the euro very soon, and risks remain of a test of 1.110 in the near term. In Canada, jobs numbers should have improved in September, but an October hike looks premature Frantisek Taborsky , Francesco Pesole and Chris Turner A hawkish Fed and fragile market sentiment should support a slightly stronger dollar near term USD: Upside risks persist The dollar lost a bit of ground yesterday as Treasuries took a breather, but we don’t see signs of a broader USD correction brewing.
US President Donald Trump has said the US won’t attack Iran before the 3 November midterms, but the oil market is reluctant to price out the geopolitical premium that has kept prices above $100/bbl despite improved Gulf supply. Today, the focus in the US calendar is on the University of Michigan surveys. Inflation expectations are expected to tick higher, while the sentiment indicator should edge lower.
Susan Collins is the only Federal Reserve member due to speak after Alberto Musalem and Christopher Waller reiterated the need to raise rates further yesterday. With global bonds and risk sentiment still looking fragile, and a hawkish Fed narrative keeping markets convinced of a December hike, we retain a preference for a slightly stronger dollar in the near term. Francesco Pesole EUR: Elusive recovery EUR/USD has made its way back above 1.120 on the back of broader dollar softness, but the common currency isn’t showing any signs of recovery against other European currencies (the Swiss Franc, Pound sterling, and Swedish krona).
It’s a sign that FX markets aren’t ready to scale back the French fiscal premium. The bond market is giving a similar message, with the 10yr OAT-Bund spread oscillating but closing at 140bp yesterday. We don’t feel Marine Le Pen’s huge fiscal tightening promise is enough to turn the tide for French bonds, and the euro may keep suffering from the French situation for longer.
We still think 1.110/1.112 can be tested in the near term. Francesco Pesole CAD: Improved jobs picture, but no October hike Today, the Canadian jobs report for September is expected to show a partial rebound. Consensus sees payrolls at +10k after August’s 42k contraction, and unemployment ticking higher to 6.5%.
The figures shouldn’t scream ‘October hike’, but can definitely consolidate expectations for a move by the Bank of Canada in December, which is fully priced in. The impact on the Canadian dollar shouldn’t be big. CAD has lost around 3% in the past month against USD, but is still in the upper half of the G10 scorecard.
Sources & References
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