FX Daily: Hot inflation to strengthen dollar floor
The desk believes that hot inflation numbers will create a stronger support level for the US dollar, particularly in light of expected higher month-on-month CPI readings. Per the full note , the macro team forecasts a 0.7% rise in headline CPI and a 0.3% increase in core CPI, both 0.1 percentage points above consensus. This suggests a re-strengthening of the dollar, which could recalibrate market expectations around an October Fed rate hike. Current moves in EUR/USD point to a retest of recent lows, creating potential trading opportunities as market sentiment shifts.
What the desk is arguing
The desk posits that today's inflation data could robustly support the US dollar. The projections of 0.7% for headline and 0.3% for core CPI exceed market expectations, which may prevent a significant dovish recalibration of the Fed's front-end pricing. Per the source, the expectation is that while the potential for a rate hike in October remains limited, the tightening outlook may solidify the dollar.
Additionally, a recent dovish remark from Fed’s John Williams, indicating a slower pace of future inflation, seems to reinforce the desk's view. While he stated that he still expects one more rate hike this year, the language used has contributed to softer dollar positioning recently.
Where it sits in our coverage
Our current spot for EUR/USD is 1.1253, with consensus targets showing a median of 1.1600 (ranging from 1.1200 to 1.2000) for December 2026. Notable targets include: - Rabobank: Dec-26 at 1.1800 - Societe Generale: Dec-26 at 1.1400 - Mizuho: Dec-26 at 1.1600
This forecast aligns closely with our expectations around a moderate upward trajectory but rests at the lower end of the range set by others, particularly the more bullish forecasts from firms like CIBC and Nomura.
How other firms see it
A range of firms project potential strength in the dollar, including Rabobank and HSBC, while firms like ABN AMRO express more bearish sentiments in currency pairs such as the EUR/USD. The divergence in opinion reflects differing views on the timing and magnitude of Fed rate hikes.
Additionally, USD/JPY movements may offer insights into dollar strength relative to the yen, particularly in this environment where inflation figures will dictate broader market moves.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US CPI data is expected to come in hotter than consensus, enhancing dollar support.
- 02The Euro is likely to retest recent lows against the dollar as tightening expectations solidify.
- 03Market sentiment is influenced by Fed officials' comments on future rate hikes.
- 04Divergence in currency forecasts reflects different positioning ahead of potential rate changes.
Market implications
Watch for EUR/USD to potentially retest lower levels if today's CPI data indeed surprises to the upside. A move above 0.3% in core CPI could signal a shift toward pricing in a higher likelihood of an October Fed rate hike.
Risks to this view
Should the CPI print unexpectedly low, or find itself at consensus levels, it could lead to a sharp shift in market sentiment that undermines the dollar's support. Additionally, a more dovish outlook from Fed officials in the wake of such data could also reverse the current bullish sentiment.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bearish | 1.1140 |
Barclays | Bullish | 1.2100 |
Goldman Sachs | Bearish | 1.1200 |
Articles FX Daily: Hot inflation to strengthen dollar floor Published 07:45 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download We expect MoM US CPI to be 0.1pp higher than consensus in both headline (0.7%) and core (0.3%) today. While that shouldn’t be enough for markets to price in 50%+ chances of an October Fed hike, it can reinforce expectations of further tightening down the road and, by extension, the dollar’s floor. EUR/USD may retest recent lows before any recovery Frantisek Taborsky , Francesco Pesole and Chris Turner We expect month-on-month US CPI to be 0.1pp higher than consensus in both headline and core today We have published the October edition of FX Talking: Au revoir, euro bulls , with updated FX forecasts and views.
USD: Upside risks persist The dollar had a soft session yesterday as stretched positioning and short-term overvaluation coincided with a recovery in global bonds. A dovish comment by the Fed’s John Williams added a bit of weight to the dollar, more by supporting risk sentiment than triggering much dovish repricing in the front end. Williams said he still expects another hike this year, but there are signs that inflation will slow and he doesn’t see further tightening in 2027.
That is in line with the median Dot Plot, and Williams is a dovish-leaning voice, but such an explicit pushback against market expectations (three more hikes by June) has been uncommon. Today, all eyes will be on US inflation data for September. The consensus is for a 0.6% month-on-month acceleration in headline CPI and 0.2% MoM in core.
Our macro team is expecting slightly hotter figures: 0.7% and 0.3% MoM, respectively. For this reason, we expect some dollar re-strengthening today. Markets may marginally increase expectations for an October hike, but for pricing to return above 50% (now 20%) we probably need to see headline close to 1.0% MoM and/or core at 0.4% MoM today.
Francesco Pesole EUR: French premium getting entrenched EUR/USD has climbed back to the 1.120 handle, entirely due to a softer dollar. The euro is not really recovering momentum in other crosses, a sign that French risk continues to weigh. The France-Germany 10yr yield spread tightened around 5bp yesterday to 137bp, seemingly driven by relief in the global bond market rather than idiosyncratic factors.
We have a one-month target of 1.13 in EUR/USD, but we could still re-test the 1.1150-1.1160 area in the coming days. As discussed in the USD section above, we see upside risks for USD today as US CPI is released. Francesco Pesole SEK: Looking healthier EUR/SEK has corrected around 1.8% from the 1 October 11.36 high, with a major contribution from French fiscal risk.
Sources & References
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