FX Talking: Don’t call it a dollar comeback
Lead — The desk interprets the Fed's anticipated rate hike as a temporary support for the dollar, but emphasizes the view that structural dollar weakness will persist in the longer term. Per the full note published by ING, while a forthcoming Fed rate increase may provide a short-lived boost, broader economic and geopolitical factors are likely to undermine dollar strength in the months ahead. This duality in outlook suggests that traders should remain cautious about positioning too heavily on a sustained dollar rally.
What the desk is arguing
The desk posits that the upcoming Fed rate hike, likely to occur later this month, could lend short-term support to the dollar, as highlighted in the ING commentary. This speculation comes on the back of increasing market rates, which historically correlate with dollar appreciation. However, the overarching view remains one of long-term dollar depreciation driven by ongoing macroeconomic imbalances and shifting global sentiment towards risk.
Supporting this stance, ING suggests that fundamental challenges such as a potentially slowing economy and persistent trade deficits could weigh on the dollar's performance over the longer horizon. This sentiment aligns with broader market expectations that favor continued loose policy globally, aside from the Fed's tightening measures.
The desk implicitly rejects the notion that a singular Fed action can reverse the dollar's longer-term trajectory. A prevailing alternative view would suggest the dollar might stage a more significant recovery if economic indicators point towards durable growth, which is not presently the consensus expectation.
Where it sits in our coverage
Our consensus target for the dollar against the euro is 1.075, with a range between 1.04 and 1.12. Specific targets from key firms include: - jpmorgan: 1.10 by Mar26 - bofa: 1.04 by Mar26
This aligns closely with views across the board, positioning our expectations near the higher end, reflecting the cautious optimism surrounding the Fed's immediate policy context, while recognizing broader bearish trends.
How other firms see it
In general, firms like jpmorgan show alignment with our view, supporting the notion of short-term dollar strength due to expected Fed actions. Contrarily, bofa presents a more pessimistic outlook, indicating potential for dollar weakness sooner than anticipated.
Indicators like the EUR/USD trajectory and shifting U.S. economic data will be paramount, as they reflect the complex interplay of domestic performance and international sentiment impacting dollar valuation.
What the calendar says
As there are no upcoming high-impact events on the calendar, attention will focus on scheduled macroeconomic data releases and how they affect trader sentiment and positioning in anticipation of the Fed's official stance. Investors should remain alert to these developments that could shift the dollar narrative.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The upcoming Fed rate hike likely supports the dollar in the short term despite the expectation of longer-term weakness.
- 02Macroeconomic factors, including economic slowdown risks, continue to pressure the dollar's outlook.
- 03Bank assessments show divergence, with some supporting short-term strength while others forecast a rapid deterioration.
- 04Traders should be cautious about overextending positions anticipating sustained dollar rally.
Market implications
Focus on the EUR/USD as a key barometer for dollar strength, particularly watching for volatility surrounding subsequent U.S. economic data releases that could shift the market dynamics. Also, bear in mind that a return to the 1.10 resistance level could signal adjustments in positioning ahead of the Fed’s decisions.
Risks to this view
A surprise outcome from the Fed, such as a more aggressive rate hike than anticipated, could rejuvenate dollar strength substantially, contradicting the desk's longer-term bearish outlook. Additionally, stronger-than-expected employment or inflation data could reinforce a hawkish Fed narrative, undermining expectations of dollar depreciation.
Reports Report FX Talking: Don’t call it a dollar comeback Published 11:05 FX A Fed hike later this month could support the dollar for now, but we still expect longer-term dollar weakness Chris Turner and Francesco Pesole 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. 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 Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download
Sources & References
How we cover this story