FX Talking: Dollar downturn delayed
The desk maintains a relatively bullish view on the dollar's strength as improvements in Middle East sentiment and sustained Fed tightening expectations suggest a delayed downturn for the greenback. As highlighted in the source commentary, the Fed's anticipated policy adjustments are likely to sustain this strength into the third quarter, with inflation remaining a persistent challenge. Given the current inflation rate exceeding 4% and robust employment data, the prospect of a dollar decline appears postponed until 2027, leading to projections for EUR/USD to potentially dip to the 1.13-1.14 level. However, the consensus remains divided, with different outlooks for major pairs like USD/JPY and EUR/USD potentially influenced by upcoming ECB and Fed decisions.
What the desk is arguing
The desk emphasizes that the dollar's downtrend is likely postponed, driven by improving conditions in the Middle East and intensified tightening from the Fed. Per the full note, the dollar's resilience is supported by the labor market's strength and prevailing inflation rates, suggesting potential strength may extend into the third quarter.
Supporting this view, market expectations have shifted to favor Fed rate hikes, and the commentary hints at potential dips for the euro, sterling, and yen against the dollar. Trading levels for EUR/USD may approach 1.13-1.14 even in light of upcoming ECB rate hikes.
Where it sits in our coverage
Our current consensus target for EUR/USD is 1.1700, with a range of 1.1200 to 1.2000. Specific targets from major firms in our coverage for Dec-26 include: - deutschebank: 1.2500 - bofa: 1.2200 - mufg: 1.2400.
This view suggests a positioning at the lower bound of the spread as our target aligns closely with the bofa outlook but diverges from the more optimistic evaluations from firms like deutschebank and mufg.
How other firms see it
Aligned views mainly come from firms expecting similar levels of dollar strength, like cibc targeting 1.1866 for March 2026, while firms like uob diverge with less bullish targets, currently forecasting 1.1536 for the same period.
Notably, the trajectory of EUR/USD is closely tied to the actions of the Fed and the ECB, with the movements in USD/JPY also reflecting broader dollar strength dynamics.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The dollar's downturn is postponed as Fed policy remains supportive.
- 02EUR/USD could approach 1.14; bearish outlooks dominate the G10.
- 03Emerging market currencies are facing headwinds, but resilient against the dollar.
- 04Potential shifts in the geopolitical landscape could further impact energy prices and inflation trends.
Market implications
Watch for EUR/USD approaching the crucial levels around 1.13-1.14; any Fed or ECB announcements could shift sentiment swiftly. Positioning signals and economic data from the US will be critical in shaping the dollar's trajectory.
Risks to this view
Any unexpected dovish signals from the Fed or evidence of decreasing inflation may lead to a rapid reversal of dollar strength. Additionally, worsening geopolitical situations affecting energy exports could introduce volatility undermining the current thesis.
Reports Report FX Talking: Dollar downturn delayed 08:14 FX Talking Improving Middle East sentiment and hopes for resumed energy flows are lifting markets, but inflation remains entrenched. Fed tightening expectations are supporting the dollar, whose strength could extend into the third quarter. The euro, sterling and yen look vulnerable, while energy exporters and hawkish EM currencies are more resilient Chris Turner Download PDF Executive summary Financial markets are once again excited about a potential Middle East peace deal and the possible resumption of energy flows out of the Gulf.
Whether that delivers much lower energy prices is highly questionable. What is clear, however, is that the inflation genie is out of the bottle and very few central banks can look through this inflation shock. The big change over the last eight weeks is that investors now expect the Federal Reserve to tighten policy.
This has undermined fears of a ‘captured’ Fed and is powering a cyclical bounce in the dollar. Given a resilient US labour market, above 4% inflation and the risk of higher energy prices, this period of dollar strength can extend into the third quarter. And the much-anticipated dollar decline now looks to be a story for 2027.
In G10, this means that EUR/USD could have a brief window down to 1.13/14 even if the European Central Bank hikes again at either the July or September meeting. Sterling looks vulnerable as the Bank of England drags it feet on tightening and a change in prime minister could happen quickly. USD/JPY risks higher levels, with FX intervention continuing to prove ineffective.
Currencies backed by energy exports and hawkish central banks should prove insulated. Emerging market currencies are coming under pressure, but investors and our team still like outperformance of the Czech koruna and the Hungarian forint. The Polish zloty looks set to lag given a less hawkish central bank.
Idiosyncratic stories are also coming through where the Israeli shekel has been hit by both the tech sell-off and intervention. At the forefront of the energy shock remains Asian FX. Policymakers are pulling out all the stops to halt the rot, but have their work cut out.
Only the heavily controlled currencies, such as USD/CNY, look truly contained until this inflation shock/dollar rally has passed. 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.
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Sources & References
How we cover this story
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Cross-firm research
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EUR/USD spot at 1.1609 sits 3.26% below a 24-firm median Dec-26 target of 1.20, with a 0.18 dispersion range flagging unusually wide disagreement.