FX Daily: Recovery in bonds and EUR/USD looking fragile
The desk is cautious on EUR/USD and USD/JPY as the dollar shows resilience amid geopolitical uncertainties, particularly pertaining to the Middle East. As highlighted in the recent commentary, a lack of progress on peace talks could see the dollar claw back strength, sending EUR/USD towards a 1.160 retest and USD/JPY towards 160. These price levels reflect market anticipation for U.S. dollar strength, notwithstanding the absence of immediate military escalation. Per the full note source, the Bank of Canada is projected to maintain a measured approach despite a expected inflation rise, suggesting broader impacts on Canadian dollar valuations.
What the desk is arguing
The desk views the recent strength of the dollar as potentially transient unless geopolitical developments provide significant clarity. The risk is that unresolved tensions will reinforce dollar buying, particularly if sentiment falters in the absence of positive headlines. This reflects a broader market sentiment that a retest of levels around 1.160 in EUR/USD and 160.0 in USD/JPY is plausible in the near term.
Current spot levels for EUR/USD stand at 1.1500, which, if breached by increasing dollar momentum, could lead to swift declines towards 1.160. Meanwhile, USD/JPY is presently at 157.0000, poised for potential upside as market positioning remains supportive of further dollar appreciation.
Where it sits in our coverage
Our current consensus places the EUR/USD target at 1.1700 with a range of 1.1300 to 1.2000, reflecting a divergence in expectations among different firms. Notable targets for December 2026 include: - jpmorgan: 1.2000 - goldman: 1.2500 - mufg: 1.2400
This suggests a relatively bullish outlook among certain firms, positioning the desk's near-term caution at the lower end of the existing targets.
How other firms see it
Firms such as morganstanley and bofa are in alignment with a bearish stance on the dollar, presenting more conservative targets for EUR/USD and USD/JPY. In contrast, deutschebank and goldman maintain higher projections for the euro, indicating confidence in a recovery.
Understanding the implications of the BoC's inflation expectations is critical, as inflation trends will affect CAD valuations, which are inversely correlated to USD positions in certain environments, impacting the broader currency landscape.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Market sentiment remains fragile amid geopolitical tensions, impacting dollar strength.
- 02A lack of progress on Middle East headlines may push EUR/USD to retest 1.160 and USD/JPY to 160.0.
- 03The Bank of Canada is not expected to adopt a more hawkish stance despite inflation rises.
Market implications
Traders should closely monitor the 1.160 and 160.0 levels for EUR/USD and USD/JPY, respectively. Market positioning around these levels will be telling as geopolitical developments unfold, particularly with no upcoming high-impact events on the horizon for the next 30 days.
Risks to this view
The primary risk to this outlook involves any sudden breakthroughs in Middle East negotiations that could lead to reduced dollar demand and a swift demand for euros. Additionally, unexpected economic data, particularly from the U.S. labor market, could alter existing dollar strength dynamics.
Sources & References
How we cover this story
Related news on this pair
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Cross-firm research
USD/JPY at 161.25: Consensus Targets 148.0 by Dec-2026
USD/JPY trades at 161.25, nearly 9% above the 22-firm Dec-2026 consensus of 148.0, with a 24-point dispersion that reflects sharply divided BoJ and US rate-path assumptions.
EUR/USD Trades 3.3% Below Dec-26 Consensus of 1.20
EUR/USD spot at 1.1609 sits 3.26% below a 24-firm median Dec-26 target of 1.20, with a 0.18 dispersion range flagging unusually wide disagreement.