G10 FX Talking: Dollar comeback can last a bit longer
The desk sees the recent buoyancy of the US dollar persisting in the near term, driven primarily by strong inflation readings in the US which may challenge equity markets and ultimately influence euro trades. Per the full note from ING, the potential for a relaunch in EUR/USD relief rallies appears limited until geopolitical negotiations, such as a US-Iran deal, materialize. The ongoing political uncertainties in the UK also threaten to keep the pound under pressure, suggesting a cautious sentiment across G10 currencies amid broader market dynamics.
What the desk is arguing
The desk anticipates a prolonged dollar strength fueled by persistently high US inflation, which could curb the anticipated rally in the EUR/USD pair until significant geopolitical developments unfold. As noted in the ING commentary, the dollar's fortitude may come at the expense of European growth prospects as markets react to inflation data.
This situation is compounded by the shifting political landscape in the UK, which continues to weigh heavily on the pound. The current spot for EUR/USD at 1.1500 is notably below several consensus forecasts, which positions this pair for a potential rebound if a US-Iran deal takes shape.
Where it sits in our coverage
Our internal consensus target for EUR/USD is 1.2000 by December 2026, with a range from 1.1300 to 1.2000. Notable firm targets include: - jpmorgan: Mar26 1.1800, Jun26 1.2000, Dec26 1.2000 - goldman: Mar26 1.1800, Jun26 1.2100, Dec26 1.2500 - ing: Mar26 1.1900, Jun26 1.2000, Dec26 1.2200
The desk's outlook is slightly above the consensus median but aligns closely with ING, which forecasts a Mar26 target of 1.1900, indicating a common belief in some level of recovery in the euro.
How other firms see it
A number of firms, including morganstanley and deutschebank, are aligned with our view, projecting EUR/USD targets that anticipate a rebound, reflecting optimism about a corrective rally. Conversely, citi stands at the lower end of forecasts, indicating a more pessimistic outlook for euro appreciation relative to dollar strength.
Key indicators to watch include the ongoing trajectory of US inflation metrics and the evolving geopolitical situation concerning the EU and Middle East interactions, which are likely to impact market sentiment significantly.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The US dollar may maintain strength due to persistent inflation impacting risk sentiment.
- 02A potential relief rally in EUR/USD is contingent upon developments in US-Iran negotiations.
- 03Political uncertainty in the UK continues to pressure the pound, complicating G10 currency dynamics.
- 04Current forecasts show notable divergence in EUR/USD targets, reflecting varying firm sentiments.
Market implications
Traders should closely monitor EUR/USD levels around 1.1500 and potential shifts in US inflation data, which could dictate short-term price movements. The upcoming geopolitical developments are also critical in sustaining or reversing dollar strength against the euro.
Risks to this view
The primary risk to this forecast includes a sudden alleviation of US inflationary pressures coupled with increased optimism from geopolitical negotiations, which could trigger a rapid unwinding of dollar long positions and support a stronger euro.
EUROPE: Hot US inflation can keep offering the dollar some support and test buoyant equity markets in the short term. That can lower the starting level for a relief rally in EUR/USD if and when a US-Iran deal is reached. Elsewhere, the pound will keep being tested by political risk, and we may have only seen the start of the FX intervention campaign in Japan
Sources & References
How we cover this story
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