FX Daily: Risk assets rally, central banks in focus
The desk envisions a bullish outlook for risk assets driven by geopolitical developments, coupled with a vital week for central bank policy. As the confirmation of a ceasefire between the US and Iran led to a rally in risk assets globally, the consequent cooling in energy prices and softening of the dollar suggests a short-term bullish bias. Per the full note by ing-think, the upcoming FOMC meeting on Wednesday will play a critical role in tempering potential dollar downside, as markets anticipate a firm stance from Fed Chair Kevin Warsh. With seven G10 central banks gathering this week, including notable events in the US, UK, and beyond, we foresee heightened focus on inflation management strategies, particularly following recent inflationary trends.
What the desk is arguing
The desk posits that the recent ceasefire has created a conducive environment for risk assets, which could limit any significant downside for the dollar in the short term. As noted in the source, the reopening of the Strait of Hormuz is a key factor in the drop of energy prices, marking a shift back to early March levels, and contributing to the recent positivity in the equities market.
Our analysis ties this move to the imminent central bank meetings, particularly the Federal Reserve’s, which could pivot market sentiment based on the communicated stance on inflation and growth. The sharper focus on short end yields reveals the market's concerns about inflation management in the wake of the energy price spike seen earlier this year.
Where it sits in our coverage
Our internal consensus for EUR/USD stands at 1.1567, with a median target of 1.1700 ranging from 1.1200 to 1.2000 by mid-2026. Notably, deutschebank places its Dec-26 projection at 1.2500, while mufg targets 1.2400 for the same tenor.
This desk view aligns moderately with market projections, sitting close to the lower end of this spread. The consensus suggests a careful wait-and-see approach, particularly in light of significant central bank communications this week.
How other firms see it
A cohort of firms, including barclays and bofa, align with a similar bullish view on risk assets, driven primarily by easing energy prices and growing demand for equities. In contrast, firms such as uob and cibc are more cautious, anticipating potential headwinds from inflation management policies.
The trajectory of EUR/USD will be closely influenced by developments not only from the Fed but also from the ECB's monetary policy stance, which could pivot based on Eurozone inflation trends, potentially affecting broader market sentiment towards the euro.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The confirmation of a US-Iran ceasefire has bolstered risk assets while alleviating pressure on the dollar.
- 02Central banks are in focus this week, especially with the FOMC meeting anticipated to set the tone for inflation management.
- 03Market expectations are tilted towards a less dovish Fed narrative under Chair Kevin Warsh, potentially influencing dollar dynamics.
- 04There is a significant variation in firm projections for EUR/USD, suggesting divergent views on risk and inflation outcomes moving into 2026.
Market implications
Traders should monitor resistance levels around 1.1700 in EUR/USD, aligning with broader central bank narratives. Upcoming developments from the FOMC could trigger movements in risk perception, particularly impacting the dollar’s positioning against major currencies.
Risks to this view
A deterioration in the geopolitical landscape, particularly related to the US-Iran relationship, could reverse the recent market optimism. Additionally, any unexpected hawkish signals from the central banks, particularly the Fed, could challenge the current bullish sentiment on risk assets.
Articles FX Daily: Risk assets rally, central banks in focus 07:55 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Confirmation of a ceasefire has seen risk assets rally, while energy, interest rates and the dollar have fallen. Assuming the US-Iran peace deal gets signed this Friday, the focus this week will be on how central banks deal with the legacy issue of higher prices. Seven of the G10 central banks meet this week.
Wednesday's Fed meeting can limit dollar downside Chris Turner , Frantisek Taborsky and Francesco Pesole Risk assets are rallying and the dollar is softer. However, Wednesday's FOMC meeting can probably limit the dollar's downside USD: Dollar explores the downside News of a US-Iran ceasefire and, more importantly, news that the Strait of Hormuz is set to reopen have seen energy prices drop back to early March levels and equities enjoy a decent rally around the world. Financial markets have had opportunities to react to this kind of deal on several occasions already, and the MSCI World Index is already 5% higher than before the war.
This suggests risk assets might not need to travel too far on today's welcome news. The bigger reaction could come at the short end of yield curves, where central banks have had to clear up the inflationary mess left by the energy spike in April and May. On the subject of central banks, it is a big week for policy meetings.
Seven of the G10 central banks meet this week, starting with Australia and Japan in early Asia tomorrow. The week then builds with rate meetings in the US, the UK, Norway, Sweden and Switzerland. The biggest focus this week, however, will be on Kevin Warsh's first meeting as Fed Chair .
The market clearly expects a less dovish set of communications (with an easing bias and expected 2026 rate cut removed), but we suspect he will have to talk tough on inflation to avoid upsetting the long end of the bond market. In terms of US activity data, Wednesday's May retail sales data is probably the most important. This will shed light on whether high energy prices have forced consumers to rein in spending on other items and build the narrative of US businesses having little pricing power after all.
Today's DXY drop has been quite modest so far. There is outside risk to the 99.00/99.15 area, but Wednesday's FOMC event risk probably limits a further sell-off just yet. Chris Turner EUR: Focus on ECB speakers this week Following last week's ECB rate hike, the focus this week will be on whether and when it needs to follow up with a second.
There are ECB speakers scheduled every day this week, starting with Joachim Nagel and Christine Lagarde this morning. Presumably, the ECB will want to keep all its options open, but it finds itself in a more comfortable position now that the market prices only a 16% chance of a rate hike in July. The EUR/USD rally has been less than impressive so far, and it is not clear that it needs to trade above 1.1650 today.
Looking across the rest of Europe this week, sterling could face some downside risks if the Bank of England is not hawkish enough. Norges Bank will probably prove quite hawkish, while Sweden's Riksbank might be closest to the Canadian position in trying to look through any energy-driven inflation spike. The Swiss National Bank should be quite neutral, although EUR/CHF could come lower if short-dated yields drop much further on the back of energy.
Chris Turner GBP: A few sterling risks this week The Bank of England meets on Thursday. Markets have pushed back expectations of the first Bank of England rate hike until the November meeting. Lower energy prices can prompt questions about whether the BoE needs to hike at all, and Governor Andrew Bailey will have to walk a fine line this Thursday.
Thursday also sees the Labour by-election in Makerfield. A victory by Andy Burnham would formally fire the starting pistol on the Labour leadership contest and likely weigh on sterling. EUR/GBP is currently holding strong support in the 0.8610/15 area, and we would expect that to hold this week.
Chris Turner CEE: The region remains driven by global headlines The regional calendar is rather light this week. Today, Poland will publish its final inflation figures for May, which should confirm a 3.1% reading. On Tuesday, core inflation figures will follow, which we believe increased only slightly from 3.0% to 3.1%.
On Wednesday, Hungary will publish wage figures. On Thursday, we believe the Czech National Bank will raise rates from 3.50% to 3.75% as the first step in tightening since the start of the US-Iran conflict. Although headline inflation remains close to the 2% target (2.1% in May), the Bank Board is concerned about core inflation near 3% (2.9% in May) and rapid credit growth.
Given the developments in the US-Iran conflict and the Fed meeting this week, attention will likely be mainly on the global story. CEE currencies saw some relief at the end of the week, and further direction will depend on global sentiment, which – at least for Monday – indicates a risk-on mood. The Czech koruna should have some additional support thanks to the CNB's hawkish tone, and EUR/CZK could test 24.00 later.
On the other hand, we see that a lot of good news is priced into the CEE and risk assets in general, which leaves the region exposed if the global story turns once again. Frantisek Taborsky Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Authors Chris Turner Global Head of Markets and Regional Head of Research for UK & CEE Chris is Global Head of Markets and Regional Head of Research for UK & CEE. Together with his team, he provides short and medium-term FX recommendations for ING's corporate and… Frantisek Taborsky EMEA FX & FI Strategist Frantisek is an FX & FI Strategist covering EMEA markets, having joined the bank in 2022. He provides short- and medium-term recommendations for ING's corporate and institutional client… Francesco Pesole FX Strategist Francesco is an FX Strategist and has been with the firm since May 2019.
His main focus is on the G10 space and, in particular, on European and commodity currencies. He began his career at Credit… In this article USD: Dollar explores the downside EUR: Focus on ECB speakers this week GBP: A few sterling risks this week CEE: The region remains driven by global headlines
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