FX Daily: Summer complacency questioned
The FX desk identifies a heightened volatility environment in response to rising energy prices and anticipated central bank reactions, particularly impacting major currency pairs. Per the full note , the dollar is expected to strengthen on the back of elevated expectations for Federal Reserve tightening, as market sentiment positions ahead of potential shifts in US monetary policy. With current EUR/USD trading around 1.1419, the consensus target remains at 1.16. Additionally, upcoming geopolitical tensions may keep investors wary, particularly concerning the US-Iran situation, which could influence dollar positioning into the weekend.
What the desk is arguing
The desk projects that the rising energy prices, compounded by expectations of central bank tightening, will bolster the dollar against its peers, leading to increased volatility across FX and asset markets. Per the full note , central banks, notably the Federal Reserve, are expected to act in response to these shifts, maintaining a bullish outlook for the dollar.
This outlook is supported by a marked increase in real USD swap rates, which have risen by 30 basis points since the last FOMC meeting, reflecting a market that is convinced of the Fed's commitment to countering inflation and restoring credibility. The anticipation of a 75 basis point hike by both the ECB and the Bank of England further underscores the dislocation in yield differentials that is unfavorable to euro positioning.
The alternative view might suggest that a sudden drop in energy prices could alleviate inflationary pressures and prompt a substantive shift in the central bank's rhetoric, though current trajectories do not support this scenario.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Dollar expected to strengthen amid rising energy prices and inflation concerns.
- 02Market anticipates significant rate hikes from the Fed, ECB, and BoE.
- 03EUR/USD struggling to gain traction as rate spreads move against it.
- 04Ongoing geopolitical tensions, particularly regarding Iran, may influence dollar positioning.
Market implications
Traders should watch the DXY closely as it approaches the June highs at 101.80, which might trigger further dollar strength. Additionally, any shifts in energy prices over the weekend could provide catalysts for movement in EUR/USD and USD/JPY, especially as these pairs are deeply entangled in the current central bank narratives.
Risks to this view
A reversal in the call could occur if there is a significant decline in energy prices that leads to a reassessment of inflation pressures, potentially causing central banks to adopt a more dovish stance than currently anticipated. Additionally, if geopolitical tensions ease unexpectedly, it may lessen demand for safe-haven dollars, thereby reversing the current bullish trend.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
BNP Paribas | Bearish | 1.1500 |
UBS | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
All 30 desk targets for EUR/USD
Articles FX Daily: Summer complacency questioned Published 08:13 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Energy price rises and the likely central bank response have triggered increased volatility across the bond, equity and FX space. This has led to some pressure on popular summer carry trades and refocused attention on energy-exporting currencies backed by central banks ready to tighten. Expectations of Fed tightening will keep the dollar bid Chris Turner , Frantisek Taborsky and Francesco Pesole Energy price increases and a bond market sell-off favour the dollar USD: It's all about the Fed The dollar continues to perform well as high energy prices raise expectations for a central bank response.
President of the ECB, Christine Lagarde, made it pretty clear yesterday that the central bank would be hiking in September, and markets now price a further 75bp of tightening for both the ECB and the Bank of England. That seems excessive, but is hard to fight unless energy prices turn sharply lower soon. Crucially – and after the June FOMC meeting – the market believes the Federal Reserve will have to respond as well.
Since that June FOMC meeting, two-year real USD swap rates have risen 30bp as investors buy into the only message we have heard from the Fed – the need to restore credibility when it comes to fighting inflation. While we do not think the Fed will hike next week, it remains very dangerous to fight this trend and, as we have been saying all week, we expect the dollar to outperform. US data today is relatively light – just July S&P PMI readings and new home sales.
But with US President Donald Trump threatening a fresh military onslaught on Iran, expect investors to hold onto their long dollar balances into the weekend. DXY is not far from June's 101.80 high and an upside break-out cannot be ruled out. Chris Turner EUR: Real rate spreads moving against EUR/USD A hawkish hold from the ECB provided little support to the euro yesterday.
The reasons for that appear to be high energy prices weighing on European growth prospects and, more importantly, a larger adjustment in real rates in the US than in the eurozone. Here, two-year real EUR/USD swap differentials have widened out to levels last seen in late 2024 when EUR/USD was trading under 1.10. We do not think EUR/USD needs to trade down to those levels now, but as long as energy prices continue to fire up Fed tightening expectations, we think the pair should be pressing the low 1.13s.
For today, the eurozone data focus will be the July flash PMIs and also the WAVE inflation survey. These should confirm the ECB's risk assessment of downside risks to growth and upside risks to inflation. Chris Turner CEE: Hawkish repricing should stabilize FX The CEE region was hit hard yesterday by the global rise in oil and gas prices, triggering a sharp repricing of implied policy-rate paths.
In Poland and the Czech Republic, markets effectively added one extra hike, taking implied tightening to 90bp in the Czech Republic and 70bp in Poland. In Hungary, markets priced out roughly half a cut, leaving only two cuts implied. This brings pricing back to or even above the stressed March-April peaks.
Our economists are keeping their forecasts unchanged for now: no rate change in Poland or the Czech Republic, and continued cuts in Hungary to 5.00% by year-end. The move appears to reflect stop-losses on earlier receiver positions and a broader positioning reversal. Given the scale of the oil and gas price increase and strong relationship with front-end rates these days, hawkish repricing could continue today unless the geopolitical backdrop improves.
On the positive side, higher market rates offer some protection for CEE FX, which has been under pressure in recent days. Based on rate differentials in our models, fair-value levels are around 4.290-4.300 for EUR/PLN and 24.100-24.150 for EUR/CZK. A stronger US dollar and risk-off sentiment will likely limit CEE FX upside in the current environment, but higher rates should at least help stabilise regional currencies.
Frantisek Taborsky KRW: The mighty won Earlier this month , we highlighted that the Korean won might be due some outperformance, especially against the Japanese yen. KRW/JPY has since rallied 3.5%, largely due to a surge in the won. That move could be attributed to some short-term factors such as reports of Hynix repatriating some of its $16bn American Depositary Receipt listing back to Korea.
But there is also some macro support for the move, where earlier this week Korea reported impressive growth of 0.6% quarter-on-quarter in the second quarter. Following that and a hawkish rate hike to 2.75% from the Bank of Korea last week, investors have added an extra 50bp to their expected BoK tightening cycle this month. It is probably a little too early to conclude that we have seen a sea change in the USD/KRW trend.
Yet it does raise some questions for USD/JPY and whether some better Japanese activity data, particularly the second quarter GDP release in mid-August, can provide a tailwind to reports that the Bank of Japan might be considering a faster pace to its tightening cycle. The implications here are that even though the energy/Fed story could drive USD/JPY briefly towards the 165 area next week, gains may well prove limited and something of a reversal could be seen through August. Chris Turner 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: It's all about the Fed EUR: Real rate spreads moving against EUR/USD CEE: Hawkish repricing should stabilize FX KRW: The mighty won
Sources & References
How we cover this story
Related news on this pair
EUR/USD starts new week under pressure as Fed hawkishness weighs on Euro
Fed hawkishness creating fresh EUR/USD selling pressure suggests market repricing higher-for-longer USD rates relative to ECB policy trajectory.
Euro: Holds below 1.15 against US Dollar as yields rise - Danske Bank
Rising yields supporting USD strength; EUR/USD trading below 1.15 suggests market repricing of relative rate differentials favors dollar appreciation.
EUR/USD hits a key juncture – Recovery or next bearish leg
Euro heads for weekly loss against US Dollar on hawkish Fed outlook
Hawkish Fed guidance supports USD strength and widens rate differential favoring dollar positioning into week-end.
Cross-firm research
USD/JPY Consensus Check: Spot at 157.07, Median Target 152 — Week of September 21, 2026
USD/JPY trades at 157.07, roughly 3.3% above the 23-firm median Dec-26 target of 152.0, with a 25.5-point dispersion signalling deep disagreement on the BoJ rate path.
USD/JPY Consensus Check: Spot at 156.89, Dec-26 Median 152.0 — Week of September 20, 2026
USD/JPY trades at 156.89, 3.22% above the 23-firm Dec-26 median of 152.0, with a 25.5-point dispersion signalling deep disagreement on the BoJ-Fed spread path.
USD/JPY Consensus Check: Spot at 156.89, Target 152.0 — Week of September 19, 2026
USD/JPY trades 3.22% above the 23-firm Dec-26 median of 152.0, with a 25.5-point dispersion range signalling deep disagreement on the BoJ-Fed spread path.