FX Daily: Muted reaction to re-escalation in the Gulf
The FX market has shown a muted response to recent geopolitical tensions in the Gulf and subsequent oil price hikes, even as shifts in interest rates suggest a more pronounced impact on fixed income. Per the full note source, the dollar remains slightly bid against low-yield currencies due to these factors, with recent FOMC minutes reinforcing a potentially hawkish outlook for the Fed. The volatility in EM currencies, particularly seen with the unwinding of positions in the Hungarian forint, indicates some risk aversion as well. Current consensus targets for EUR/USD suggest room for movement, with the average target around 1.1750 for December, amidst a backdrop of diverging expectations among banks.
What the desk is arguing
The desk frames this as a period where geopolitical tensions in the Gulf could lead to a delayed disinflation trend, impacting the Federal Reserve's potential rate decisions. The elevated Brent crude prices, nearing $80 per barrel, signal a more cautious stance for the Fed, which could support the dollar against lower-yielding currencies.
Support for this thesis can be derived from the strong movements at the short end of the interest curves and recent discussions from the FOMC, indicating that the Fed may pursue rate hikes if inflation indicators remain stubborn. The conditions underline a strong positioning for the dollar against high-yielders, reflecting a shift in trader sentiment.
Where it sits in our coverage
Our current consensus target for EUR/USD is 1.1750, with a range encompassing 1.1200 to 1.2000 through December 2026. Specific firms such as mufg and commerzbank project targets of 1.1800 and 1.1900, respectively, for June 2026.
This view bolsters our alignment with other firms projecting modest weakening against the dollar, yet our stance sits slightly lower than goldman's target of 1.1800, representing a near upper bound in the current spread.
How other firms see it
Among aligned firms, mufg and scotiabank reflect a bullish outlook on EUR/USD, anticipating that the dollar's strength may cap potential gains. In contrast, citi and rbc maintain a more cautious stance, projecting targets towards the lower end of the spectrum.
Furthermore, the USD/JPY trajectory will be critical to monitor as it mirrors Fed rate policy—even minor shifts in USD/JPY could provide insights into broader market sentiment regarding Fed actions against the backdrop of rising oil prices.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Geopolitical tensions have muted FX market responses, though they impact fixed income more prominently.
- 02The dollar remains bid against lower-yielders as market shifts signal potential Fed rate hikes due to increased oil prices.
- 03Market volatility in EM currencies hints at cautious positioning amid uncertainty.
- 04Consensus target for EUR/USD remains around 1.1750 for December, indicating room for price movements.
Market implications
Watch for potential moves in EUR/USD around the current levels of 1.1434, particularly as oil prices oscillate near $80. The evolution of U.S. interest rates and Fed guidance in the coming weeks will be critical to gauge movement in dollar pairs.
Risks to this view
A reversal could occur if geopolitical tensions de-escalate, leading to stabilization in oil prices and potentially easing inflationary pressures. Additionally, weaker-than-expected U.S. economic data could impair the Fed's hawkish outlook.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Goldman Sachs | — | 1.1200 |
UOB | — | 1.1445 |
MUFG | — | 1.1800 |
Articles FX Daily: Muted reaction to re-escalation in the Gulf 07:50 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The more serious exchange of fire in the Gulf and the jump in oil yesterday have seen far less of a reaction in FX than in the rates space. However, Brent closer to $80/bl than $70/bl stands to delay any disinflation trends and increase the risk of a Fed hike. Expect the dollar to remain bid versus the low-yielders, while the Korean won might outperform Chris Turner , Frantisek Taborsky and Francesco Pesole US President Trump during a press conference at the 2026 NATO Summit in Turkey on 08 July 2026 USD: Higher energy prices will fuel the Fed hawks Dominating global markets yesterday was the seeming breakdown in negotiations between the US and Iran and a more serious exchange of fire.
That has extended overnight, with the US military striking infrastructure targets in northern Iraq – the first strike on infrastructure since early April. Brent briefly touched $80/bl and we saw some large moves at the short end of interest curves. This follows the playbook from early March.
The FX reaction was more muted, where the dollar was a little stronger, but the biggest impact was a jump in volatility and the unwinding of carry trade positions in the EM high-yielders. This especially hit extended positions in the Hungarian forint – see below. In addition, last night saw the release of the FOMC minutes for the June meeting.
Some had feared that Fed Chair Kevin Warsh's new non-communications strategy would gut these minutes. That was not the case. Our key takeaway is that those at the meeting were presented with two scenarios – a delayed cut in rates should inflation dissipate, or a more immediate hike if inflation remains high.
Both of those scenarios were seen as equally credible. The dollar and US rates did not move much on the minutes, and it will probably be next week when we get a better steer on the Fed. Here, we have the June CPI figure next Tuesday and Kevin Warsh's testimony to the House on Wednesday.
Today at 15CET we will also hear from the New York Fed's John Williams. He's from the dovish end of the spectrum. Our bias is that higher energy prices will provide fuel for the Fed hawks and keep the dollar supported on dips – particularly against the low yielders.
High-yielding currencies can enjoy better insulation against the stronger dollar given the summer months and investors' tendency to jump into carry trade positions on any sell-off. DXY is trading around 101.00 and we favour it back to the 101.50 area. Chris Turner EUR: Greenland seems a distraction EUR/USD has held up remarkably well given the jump in oil prices yesterday.
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