FX Daily: Risks skewed to a stronger dollar
The desk believes the risks are increasingly skewed towards a stronger dollar, especially in light of Kevin Warsh's recent hawkish comments. His emphasis on persistent inflation and a robust economy suggests that the Federal Reserve is likely to maintain or even accelerate its tightening cycle. Per the full note , this sentiment is reinforced by rising energy prices, which create additional dollar demand amidst expectations of a potential rate hike by the Fed as soon as September.
What the desk is arguing
The desk's outlook centers on a stronger dollar trajectory, primarily driven by recent hawkish signals from Fed officials and newfound strength in energy prices. This aligns with the broader narrative that despite concerns about fiscal consolidation, the Fed will likely proceed with further rate hikes, particularly after the Beige Book release and discussions with Fed officials like Christopher Waller.
Critically, the market dynamics are throwing the spotlight on low-yielding currencies such as the Swiss franc, which is expected to underperform relative to the dollar due to its zero-bound policy. A dollar advance is particularly anticipated against USD/CHF given that Swiss interest rates remain firmly anchored.
Where it sits in our coverage
Currently, our consensus target for USD/CHF stands at 0.8000, with a range extending from 0.7600 to 0.8200. Some specific firm targets include: - commerzbank: March 26 at 0.7810 - goldman: March 26 at 0.8000 - ucb: March 26 at 0.7900
This bullish call for the dollar is consistent with the broader market view, as our targets suggest a modest upside even within the tight ranges observed across firms, some of whom are similarly positioned, while others set more conservative targets. Notably, scotiabank and citi stand at the higher range, further lending credence to a potential dollar appreciation.
How other firms see it
Aligning firms generally reflect a bullish sentiment on the dollar, suggesting they see merit in the stronger dollar view outlined by our desk. For instance, both goldman and hsbc are positioned similarly with their respective targets supporting a stronger dollar outlook.
Conversely, firms like barclays and citi are somewhat contradictory with their more cautious outlooks on dollar strength, hinting at potential vulnerabilities in their forecasts. Additionally, the USD/JPY currency pair also sits closely related to this analysis given the implications of U.S. monetary policy divergences versus Japan's steady low interest environment.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Recent comments from Fed officials signal increased likelihood of rate hikes, supporting a stronger dollar outlook.
- 02Rising energy prices add inflationary pressures, enhancing dollar demand.
- 03Consensus on USD/CHF indicates potential upswings, with our target at 0.8000 reflective of a bullish stance.
- 04Contrasting opinions exist among firms, with a divergence in dollar strength forecasts.
Market implications
Traders should monitor USD/CHF as it shows promise for continued strength, particularly as economic data and statements from the Fed unfold. A decisive move above current levels could reinforce upward momentum, making it a pivotal pair for those aiming to capitalize on the dollar's strengthening.
Risks to this view
A reversal in dollar strength could occur if upcoming economic data signals a drastic slowdown in U.S. performance or if the Fed unexpectedly leans dovish, undermining the cyclical narrative underpinning the dollar's gains.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
Standard Chartered | Neutral | 1.1600 |
Morgan Stanley | Bullish | 1.2150 |
Articles FX Daily: Risks skewed to a stronger dollar Published 07:45 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The dollar has taken note of Kevin Warsh's hawkish speech last Friday and looks to be holding onto gains. The renewed spike in energy prices only adds to the hawkish trend priced across money markets and again appears to be dollar-supportive. Elsewhere, after a dovish hike from the Reserve Bank of New Zealand earlier, we can see a dovish hold in Canada Chris Turner , Francesco Pesole and Frantisek Taborsky The dollar is holding onto gains following Kevin Warsh's dovish speech last week USD: Fed story will dominate There remains much focus on the long end of bond markets, where little appetite for fiscal consolidation in recent years seems to be coming home to roost.
As Francesco Pesole highlighted yesterday , there remain fears that Treasury Secretary Scott Bessent will dip into his large toolkit again to support the bond market and traders will look to hit a bid in USD/CHF to express the dollar debasement trade. That is the risk. But the new baseline seems to be that the Fed will, after all, hike rates in September.
Fed Chair Kevin Warsh has made it reasonably clear that inflation is not falling quickly enough to target and, given a reasonably strong economy, the Fed will need to act. Feeding into that story over the next 24 hours will be tonight's release of the Fed's Beige Book and then a moderated discussion tomorrow with the Fed's Christopher Waller. We expect him to emphasise that the Fed looks likely to hike, barring some surprisingly dovish data ahead of the FOMC on 16 September.
We think the cyclical Fed story can trump the dollar bearish debasement theme and some bearish US yield curve flattening can see the dollar advance against the low-yielders – and especially against the Swiss franc, given that Swiss policy rates look most anchored near zero. If we are wrong and are underestimating the pressure on the long end to sell off, then the yield curve steepening from the long end can probably drag the dollar a little lower even as high-yield FX underperforms amidst higher generalised volatility. US data today sees the monthly ADP employment print and Durable Goods Orders.
Based on Warsh's speech on Friday, it seems even weak labour market data may not be enough to stop the Fed from hiking. We favour DXY grinding higher to the 100.10/20 area and probably moving a little higher tomorrow on the Waller event. Chris Turner EUR: Headwinds grow Higher energy prices and, in particular, a more hawkish Fed have seen EUR/USD swing lower in recent ranges.
Below 1.1565/70, EUR/USD can extend its drop to the 1.1520 area and we think something like 1.15 looks an appropriate target for month-end. Higher energy prices continue to drag ECB tightening expectations higher, with currently another 80bp of tightening priced by next summer. Our team feels that is highly unlikely.
Sources & References
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