FX Talking: Dancing in the dark
The desk’s outlook suggests dampened enthusiasm for the dollar amid expectations that the Federal Reserve may adopt a more lenient approach to temporary inflation pressures, limiting the currency's upward trajectory. As communicated in the recent commentary by ing, this perspective lays the groundwork for a strengthening EUR/USD later in the year, particularly as the Fed appraises its policy stance. Current indications point to a stable EUR/USD at 1.1434, which is significantly below the consensus target of 1.1750 for December 2026, underscoring potential upside for the euro.
What the desk is arguing
The desk argues that the dollar's rally, powered by Fed-induced gains, is likely to fizzle as the central bank turns a blind eye to transient inflation, maintaining a supportive climate for the euro. Per the full note by ing, further tightening is expected to be avoided, which should help uplift EUR/USD later this year.
Supporting the desk's view is the current positioning and sentiment around the dollar, alongside a consensus that projects the EUR/USD to trend upwards, where banks are anticipating a target around 1.1750 by December 2026. Given that inflation pressures are temporary, the outlook for the dollar's performance could be curbed.
The alternative read would be that if persistent inflation were to emerge, it could provoke unanticipated tightening from the Fed, thereby bolstering the dollar beyond current expectations, but this scenario seems less likely in the near term.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Fed is expected to overlook temporary inflation, curtailing another rate hike.
- 02The EUR/USD pair is projected to recover, with consensus targets averaging around 1.1750 by December 2026.
- 03Current positioning hints at a weaker dollar and stronger demand for activity-linked currencies.
- 04Despite the dollar's recent strength, long-term forecasts favor euro resilience.
Market implications
Traders should monitor the EUR/USD for potential breaks above current levels, particularly eyeing movements toward the consensus target of 1.1750. Additionally, shifts in Fed policy or unexpected inflation data could directly impact dollar valuations.
Risks to this view
Key risks that could invalidate this bullish outlook on EUR/USD include surprising inflation data prompting a hawkish response from the Fed, which could strengthen the dollar. Any geopolitical tensions or economic downturn evidence could also alter currency trajectories significantly.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Neutral | 1.1450 |
Citi | Bearish | 1.1000 |
MUFG | Bullish | 1.1800 |
Reports Report FX Talking: Dancing in the dark Published 13:00 FX The dollar is holding onto Fed-driven gains, but we expect the central bank to look through temporary inflation and avoid further tightening. That should limit the dollar's upside and support EUR/USD later this year. Elsewhere, activity-linked currencies are favoured, while low-yielding defensives and some Asian currencies may continue to lag Chris Turner , Francesco Pesole and Frantisek Taborsky Download PDF FX Talking 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.
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