FX Daily: Staring at the geopolitical headlights
The desk believes that despite recent geopolitical tensions, notably in the Gulf and evolving dynamics in the Russia-Ukraine conflict, the dollar is poised for support due to resilient domestic growth and elevated energy prices. Per the full note, the desk notes a significant disconnect between current dollar strength and robust economic indicators such as the above-consensus August NFP reading alongside persistent high energy costs. With the Friday CPI data anticipated to reaffirm the Fed's stance ahead of the September rate decision, the dollar's trajectory may establish more clarity. Moreover, the upcoming Treasury auctions will provide further context on market sentiment in the bond space.
What the desk is arguing
The desk frames this as a critical juncture where the dollar should exhibit more strength, given robust economic indicators such as high energy prices and favorable employment reports. However, the prevailing sentiment in equity markets may be suppressing demand for the dollar, shifting risk appetite towards equities instead. This perspective is bolstered by the negative correlation seen between dollar movements and global equity trends.
In particular, the upcoming monthly U.S. CPI release should provide key insight, where expectations of 0.4% and 0.2% month-on-month growth for headline and core inflation, respectively, could fortify the Fed's decision to increase rates by 25 basis points on September 16. Such a tightening signal could bolster the dollar further, potentially challenging current resistance levels.
Where it sits in our coverage
The current consensus target for EUR/USD aligns with a median of 1.1700, ranging from 1.1200 to 1.2000, with firms like morganstanley (Dec-26 target at 1.2150) and rbc (1.2000) projecting higher outlooks. Notably, ains also forecasts a similar target range for EUR/USD.
The desk's outlook diverges from consensus as their initial targets tend towards the middle of the predicted range, highlighting potential for a stronger bullish sentiment. Current positioning may indicate skepticism around the dollar's ascent amid wider equity performance across markets.
How other firms see it
Several firms are echoing similar bullish sentiments towards the dollar, with morganstanley and rbc projecting targets that align closely with the desk's views, while firms like nomura have a more cautious approach, forecasting only modest appreciation in the USD pairs. Such contrasting views suggest an interesting divergence in market sentiment.
Looking ahead, it is prudent to monitor the USD/JPY dynamics as any shifts towards a more accelerated tightening from the Bank of Japan could provide volatility in cross-currency impacts, particularly as global macro accounts reassess their risk exposure. Understanding these correlations will be essential in navigating the evolving landscape ahead.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The dollar remains supported despite geopolitical tensions impacting market sentiment.
- 02Upcoming U.S. CPI data is crucial for shaping Fed expectations and dollar trajectories.
- 03A significant inverse correlation exists between dollar strength and global equity performance.
- 04Projected targets for EUR/USD indicate a potential bullish sentiment among several major banks.
Market implications
Watch the USD/JPY level around 155 as it may indicate key macro account positioning shifts. Additionally, upcoming CPI data will be pivotal in determining future Fed actions.
Risks to this view
A lower than expected CPI reading or sign of diminishing economic momentum could compel a reversal in dollar strength. Any geopolitical developments that significantly alter market risk appetites could also undermine the dollar's current positioning.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Goldman Sachs | Bearish | 1.1200 |
MUFG | Bullish | 1.1800 |
J.P. Morgan | Bearish | 1.1300 |
Articles FX Daily: Staring at the geopolitical headlights Published 07:40 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download FX markets are steady as they absorb the latest geopolitical developments. These include renewed escalation in the Gulf, possible Russia-Ukraine peace talks and far-right success in regional German elections. Resilient growth and high energy prices mean 60-90bp tightening cycles remain priced across major economies.
The dollar can stay supported Chris Turner , Frantisek Taborsky and Francesco Pesole USD: Should be doing a little better High energy prices and an above-consensus August NFP reading mean the dollar should really be doing better than it is. The fact that it is not probably owes to the still constructive investment environment, where global equity markets, including emerging markets, continue to perform well. In fact, of the various correlations we monitor, the inverse correlation between global equities and the dollar seems to be the strongest right now – far higher than the dollar's link to oil prices.
The dollar has also had to contend with last week's big drop in USD/JPY, where it looks like global macro accounts are speculating on some kind of grand bargain in September or October, where faster Bank of Japan tightening is backed up by a portfolio shift towards more domestic assets by the $2trn GPIF national pension fund. Here, we continue to see 155 as a big level in USD/JPY, above which some more consolidation should be due. Looking ahead this week, the US macro focus should be on Friday's August CPI data, where month-on-month readings at 0.4% and 0.2% for headline and core should be enough to sway the Fed towards a 25bp rate hike on 16 September.
This is just priced with a 58% probability at the moment. The US Treasury market will also be in focus, given $119bn auctions of three, 10 and 30-year bonds. Wednesday also sees the start of the US Treasury's slightly controversial buy-back operation of longer-dated Treasuries, where any Treasury weakness stands to weigh on the dollar.
We prefer to back the themes of higher energy prices and an under-priced Fed giving some support to the dollar in the near term. The US Labor Day public holiday will limit activity today, but DXY can probably drift higher in a 99.00-99.50 range. Chris Turner EUR: Contained While not a major negative for the euro, Sunday's election results in Saxony-Anhalt will serve as a reminder of the declining popularity of Chancellor Merz's CDU party, and, if backed up by similar results in two further regional elections, raise tensions within the governing coalition.
So far, the German government's infrastructure and defence spending plans seem to be paying dividends for German growth prospects and international investors will not want to see those interrupted. On the subject of growth, today should see eurozone second-quarter growth confirmed at a decent 0.4% quarter-on-quarter figure and also see another decent increase in the Sentix investor confidence data. The main event of the week, however, will be Thursday's ECB meeting , where we see some downside risks to the euro.
Sources & References
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