FX Daily: One test down, four to go
The desk interprets the recent FX Daily report as a significant indicator of a dovish shift in Federal Reserve policy, following a weak jobs report, which may weigh on the USD in the run-up to upcoming inflation data. As per the full note, the weak -20k print in payrolls was compounded by over 100k downward revisions, contributing to a forecast for a 0.1% month-on-month CPI reading that aligns with the dovish narrative. With several tests ahead, including the CPI release, the potential for USD downside appears dominant, particularly against the JPY, which may be recovering from recent shorts. The current spot for EUR/USD stands at 1.1419, suggesting a cautious outlook amidst these developments.
What the desk is arguing
The desk posits that the recent dovish signals from the Fed are indicative of further USD weakness, especially with the upcoming CPI release expected to reinforce this sentiment. Per the full note, the weak payrolls report is viewed as the first of five tests leading to the September FOMC, with a consensus forecast of July CPI at 0.1% MoM, below prior expectations of 0.2%.
The labor market data diverts attention to shrinking payroll increases, revealing average growth at just 20k over the past three months, which poses risks for economic robustness. This dovish lean might favor the JPY, poised to recover from intervention-induced positioning issues.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.1583, with a range spanning from 1.1200 to 1.2000 as of December 2026. Notable targets include goldman at 1.1800 and morganstanley at 1.2000, reflecting optimism in certain segments.
This view generally aligns with broader cross-firm expectations, yet it leans toward the mid-range of forecasts, indicating some divergence in sentiments about USD weakness based on current economic signals.
How other firms see it
Several firms, including goldman and morganstanley, are aligned with a bullish EUR/USD stance, anticipating further appreciation. On the contrary, dansebank foresees targets more conservative, reflecting skepticism towards the forecasted shifts with its lower projections.
As these dynamics unfold, watch for corresponding movements in USD/JPY as well, with the trajectory likely influenced by both U.S. CPI data and the Bank of Japan’s policy stance.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Weak payrolls suggest a dovish Fed, with USD downside risks now prevalent.
- 02July CPI is expected at 0.1% MoM, further supporting bearish USD sentiment.
- 03The current spot for EUR/USD is 1.1419, indicating cautious trading around upcoming data.
- 04JPY may experience upward momentum as it recovers from intervention-related positions.
Market implications
Focus on the upcoming CPI release on Wednesday, as it could guide USD movements, particularly against the JPY and EUR. A reading at or below expectations should sustain the bearish momentum for the dollar.
Risks to this view
Any unexpected strength in the CPI data, particularly a print above the 0.2% consensus, could spark a reversal in the current dovish market sentiment and pressurize long positions in JPY and EUR against the USD.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
ING | Neutral | 1.1700 |
Rabobank | Bullish | 1.1800 |
Articles FX Daily: One test down, four to go Published 07:51 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Friday's weak payrolls report delivered the first dovish signal in our five-test countdown to the September FOMC. Wednesday’s CPI is the next test; we expect a 0.1% MoM headline print to help the dovish case a bit further, keeping USD downside risks dominant. Good news for the yen, which is struggling with post-intervention short rebuilding Francesco Pesole , Frantisek Taborsky and Chris Turner Wednesday's CPI release is set to provide the second of five tests to our call for no Federal Reserve rate hikes this year We have recently published our August update of FX views and forecasts: FX Talking: Caught between war and Warsh USD: Plenty of dovish repricing can still happen At the start of August, our call for no Federal Reserve hikes this year was set to face five major tests before the 16 September FOMC: two jobs reports, two CPI reports and Jackson Hole.
Our feeling was that if those events failed to trigger a dovish shift in market expectations, pricing a September hike above 50% could itself have materially increased the risk of a hike, if only to avoid another bond sell-off on meeting day. The first test arrived on Friday and came through clearly dovish and dollar-negative. As James Knightley notes , the -20k payroll print was not the only concern.
More than 100k of downward revisions leave average payroll growth at just 20k over the past three months, with health and social care still doing most of the heavy lifting. Meanwhile, the fall in the unemployment rate was largely driven by people leaving the labour force rather than finding work. We expect the second test, Wednesday's July CPI release, to send a similar, albeit less dramatic, message.
Our forecast is for headline CPI at 0.1% month-on-month versus 0.2% consensus, and core CPI at 0.2%, in line with consensus. Our dovish Fed call is strengthening, and so is our bearish bias on the dollar. Despite Friday’s repricing, 11bp are still priced in for September, 28bp for December and 40bp for April.
There remains ample room for dovish repricing to harm the dollar if we are right about the Fed. Today, the US calendar is empty, but we’ll hear from Fed arch-hawk Beth Hammack. The yen should, in theory, remain one of the main beneficiaries of dovish US surprises given its high sensitivity to rates.
The problem is the seemingly inevitable bias to rebuild JPY shorts after an intervention episode. Neither intervention risk nor growing confidence in a September Bank of Japan hike – with this morning's minutes modestly more hawkish – appears sufficient to counter that trend. USD/JPY has already returned to the pre-payroll 158.30-158.50 area.
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