FX Daily: Porridge cools for goldilocks
The desk posits that recent cooler US economic data has diminished the likelihood of a Federal Reserve rate hike in September, leading to a weaker dollar and bolstered risk assets. Per the full note, this environment supports continued carry trades and long commodity positions, especially as expectations for Fed tightening have been scaled back significantly. Our consensus forecasts for the EUR/USD pair indicate a target of 1.1700 for March 2026, aligning with several firms' outlooks that reflect similar optimism. Notably, the upcoming release of the FOMC minutes from the July meeting could provide further insight but is unlikely to shift the current sentiment barring unexpected geopolitical developments.
What the desk is arguing
The desk frames the current narrative around the USD as one of weakness driven by a run of softer economic indicators that complicate the Fed's rate-hiking trajectory. Per the source commentary, the recent retail sales data has significantly lowered the probability of a September hike, with only 7 basis points priced in for that meeting. Additionally, expectations for tightening into next year have been reduced from 50 basis points to just 35 basis points, indicating a notable shift in market sentiment.
This dovish pivot is evidenced by the DXY exploring the lower end of its trading range (99.40-100.00), suggesting that the dollar could trade softer throughout the week. This positions risk assets favorably as traders focus on higher-yielding currencies and commodities, moving away from traditionally safe currencies like the JPY and CHF.
Where it sits in our coverage
For the EUR/USD pair, our consensus target currently sits at 1.1700, with forecast ranges reflecting variability among firms: - Deutsche Bank: Mar26 1.1800, Jun26 1.2500 - Morgan Stanley: Mar26 1.2000, Jun26 1.2300 - Commerzbank: Mar26 1.1900, Jun26 1.2000
This outlook is generally in harmony with market sentiments reflected by other firms but leans toward the upper bounds of the consensus range, specifically with Rabobank and ING also aligning closely to expectations around 1.1700.
How other firms see it
Firms like JPMorgan and Goldman Sachs are similarly predicting upward movement for the EUR/USD, whereas others, including UBS and Rabobank, suggest caution with lower targets around 1.1400. The contrasting views indicate a division about the dollar's immediate strength versus the potential of Eurozone recovery.
The expected trajectories of the GBP/USD and USD/JPY pairs should also be monitored closely, particularly as sentiment shifts focus towards US labor data and the implications for Fed policy. These pairs may exhibit spillover effects based on upcoming central bank commentary and economic prints.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Recent US retail sales data has weakened the case for a Fed rate hike in September.
- 02The DXY index may continue to trend lower, supporting risk assets and higher-yielding currencies.
- 03EUR/USD consensus target aligns at 1.1700 for March 2026, signaling bullish sentiment.
- 04Forthcoming FOMC minutes may provide clarity, but significant shifts in sentiment are unlikely.
Market implications
Traders should watch for a potential move in the EUR/USD towards the consensus target of 1.1700 as the dollar remains under pressure. The release of the FOMC minutes on Wednesday could act as a catalyst for volatility, particularly if the language suggests a more hawkish stance than currently anticipated.
Risks to this view
A reversal in the dollar's weakness could occur if unexpected strong data emerges or if geopolitical tensions escalate, prompting a flight back to safe-haven currencies. Additionally, any hawkish signals in the upcoming FOMC minutes could prompt a reassessment of carry trades currently favored in the market.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Société Générale | Bearish | 1.1400 |
Scotiabank | Bearish | 1.1200 |
Commerzbank | Bullish | 1.2200 |
Articles FX Daily: Porridge cools for goldilocks Published 08:01 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download A slightly cooler run of US data recently has cut the chances of a Fed hike in September. Lower short-dated US rates and a mildly weaker dollar are supportive for the risk environment and will keep summer volatility levels subdued. Barring an upswing in geopolitical risks, it is hard to see the scheduled events calendar this week upsetting this view Chris Turner , Frantisek Taborsky and Francesco Pesole A run of slightly cooler US data is weighing on the dollar and proving supportive for risk assets USD: Softer run of data continues Friday's release of a softer set of US retail sales data for July has added to the case against the Federal Reserve hiking rates in September.
Just 7bp of hikes are now priced at that meeting, and expectations for a 50bp tightening cycle into next year have been scaled back to 35bp. Global risk markets are enjoying the fact that the Fed can leave rates unchanged a little longer, and investors seem happy to continue targeting long carry trade and long commodity stories at the expense of the low-yielding Japanese yen and Swiss franc. Looking at the US data calendar this week, it is hard to see much changing.
The highlight could be Wednesday evening's release of the minutes of the 29 July FOMC meeting. This was the meeting that saw a 9-3 vote for unchanged rates and a confusing press conference, which saw longer-dated Treasuries sell off. Given that we've seen slightly cooler activity data since that meeting, we think it will be hard for the market to switch back to a fully hawkish mindset if there are a few sentences in the minutes pointing to a closer call on the unchanged rates decision than most think.
DXY is exploring the lower end of a 99.40-100.00 trading range and can probably trade to the soft side all week as investors focus on higher-yielding and procyclical currencies. Chris Turner EUR: Exploring the upside Friday's further drop in short-dated US rates is helping EUR/USD reconnect with the short-term fair value identified by Francesco Pesole on Friday . It is currently pressing intraday resistance at 1.1585, above which 1.1650 is the outside possibility in quiet trading conditions.
Even though the euro is far from a high-yielder, it seems international investors like the eurozone as a diversification play against the US AI boom. We will be interested to see whether the eurozone June current account data (released Wednesday) continues to show very strong demand for eurozone debt and equity markets. This flow is currently running around €1tr on a rolling 12-month basis.
On the eurozone calendar this week are European Central Bank speakers and Friday's release of the flash PMIs. These are probably euro-supportive. Chris Turner GBP: Bigger week for UK data After a quiet few weeks, the UK data calendar picks up.
Sources & References
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