G10 FX Talking: The narrow path to a weaker dollar
The desk views a potential for the U.S. dollar to weaken, hinging on the Federal Reserve's decision to refrain from raising interest rates in September, if supported by softening U.S. CPI data. Per the full note, this dovish Fed stance could lead to modest bullish steepening in the U.S. yield curve and a weaker dollar against procyclical currencies like the euro. This outlook is predicated on market expectations, which suggest a less than 30% chance of a rate hike, thereby allowing the Fed to maintain control over long-dated Treasury yields. Consensus for EUR/USD points to a dual year-end target of 1.20, showing market readiness for a dollar decline in a risk-positive environment.
What the desk is arguing
The desk predicts a softer dollar if the Federal Reserve adopts a holding pattern during their upcoming meeting. This expectation is primarily driven by potential softer inflation readings for July and August, positioning traders to anticipate no increases from the Fed on September 16.
Key indicators such as U.S. CPI and the ECB's anticipated tightening, with predictions of a 2.50% rate in September, underpin this thesis. When the Fed opts for a pause, the resulting shift in the yield curve could catalyze a risk-positive environment, ideally supporting a benign decline for the dollar into year-end.
Where it sits in our coverage
With the current spot price for EUR/USD at 1.1466, our internal coverage consensus suggests a target of 1.1700 by March 2026, ranging between 1.1200 and 1.2000. Some notable targets from firms include: - deutschebank: 1.1800 (Mar26) - ubs: 1.2000 (Mar26) - bofa: 1.1700 (Mar26)
This dovish perspective aligns with deutschebank and ubs, sitting towards the higher end of the cross-firm forecast spread.
How other firms see it
In contrast, other firms like bofa and hsbc hold a more bearish viewpoint, anticipating lower targets for the euro against the dollar and indicating potential challenges for a dollar decline, reflective of differing inflation expectations between the U.S. and Eurozone.
The intersection of this analysis with the USD/JPY narrative is critical, particularly as recent joint interventions have highlighted volatility in Asia’s FX markets. Movement in this pair could reflect broader implications for dollar weakness dependent on Fed actions and other central banks' responses.
01Dollar weakness is anticipated if the Fed avoids hikes in September amid softer CPI data.
02Expectations of an ECB rate hike support the euro against the dollar.
03Current EUR/USD consensus targets range around 1.1700 for March 2026.
04Recent USD/JPY interventions introduce additional complexities for dollar forecasts.
Market implications
The key level to watch is the EUR/USD 1.1600 mark as this may indicate bullish momentum expected from a dovish Fed decision. Additionally, traders should monitor the market's reaction to inflation data leading up to the FOMC meeting on September 16, which could significantly influence dollar dynamics.
Risks to this view
Any surprise shift in inflation readings, particularly stronger CPI data, could lead the Fed to consider an unexpected hike, reversing the dollar's current trajectory. Additionally, escalations in geopolitical tensions or foreign intervention in FX markets could also alter the expected outcomes and positions in the G10 currencies.
Articles G10 FX Talking: The narrow path to a weaker dollar Published 12:15 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download It's a bold call, but we think the Fed will just about have enough supporting evidence to avoid hiking and avoid crashing the bond market in September. If that's the case, some modest bullish steepening of the US yield curve can see the dollar weaken against the procyclical currencies, including the euro. USD/JPY may well have topped if the Fed avoids hiking Chris Turner and Francesco Pesole The path to a softer dollar hinges on the Fed staying on hold in September EUR/USD: It’s a close call, but we see no Fed hikes and $ weakness Spot One month bias 1M 3M 6M 12M EUR/USD 1.154 Mildly Bullish 1.16 1.17 1.18 1.20 It is a very close call, but we think the Fed will try to get away with not hiking this year.
That call will need to see some softer US CPI reads coming in for July and August ahead of the FOMC on 16 September. The call also requires the market pricing around a 30% chance of a Fed hike or less on decision day. Otherwise the Fed will be wary of losing control of long-dated Treasury yields.
The ECB should hike to 2.50% in September. Any further hike beyond that is unnecessary and the ECB will cut back to 2.25% next summer. Drought conditions in Europe are weighing on activity.
If we’re right on the Fed, the dollar should be due a benign decline into year-end in what should be a risk-positive climate. Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts USD/JPY: The first joint intervention to buy yen since 1998 Spot One month bias 1M 3M 6M 12M USD/JPY 157.84 Bullish 160.00 158.00 158.00 154.00 Early August saw the US Treasury jointly intervene with Japan to buy yen for the first time since 1998. US participation was likely driven by an effort to control the JGB sell-off, but also to discourage any competitive devaluations (read China) across Asian FX.
There is a suggestion of a quid-pro-quo for US participation here that the BoJ will hike earlier in September. Will it be effective? Faster BoJ tightening would help, but no change from the Fed is a pre-requisite to take upside pressure off the dollar.
We see a 155-160 range before mid-September. We’re on the lookout for new policy initiatives in Japan. JGBs being included in new ISA retail products would be big news.
Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts GBP/USD: BoE doves getting a little more dovish Spot One month bias 1M 3M 6M 12M GBP/USD 1.3463 Neutral 1.35 1.34 1.34 1.33 GBP/USD continues to trade in the middle of a 1.32-1.36 range, and it is hard to see a breakout happening anytime soon. Kevin Warsh’s dovish July FOMC press conference took the sting out of the dollar’s rally, but equally on the UK side, the BoE meeting was slightly dovish. Even though 6-3 voted for a hold, the key doves sounded more convinced that there was no need for a hike.
At some stage 45bp of expected BoE tightening gets removed. Our call is that UK inflation tops out below 3.5% YoY and drops into year-end, dragging UK rates and GBP lower. The first Andy Burnham budget on 28 October presents an important event risk, where tax rises could be on the agenda.
Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts EUR/JPY: US Treasury sells EUR/JPY Spot One month bias 1M 3M 6M 12M EUR/JPY 182.18 Bullish 186.00 187.00 186.00 185.00 EUR/JPY has played a big part in recent joint FX intervention since the US Treasury chose to intervene in EUR/JPY, not USD/JPY. We presume it chose to do so because of messaging, where the action was buying yen and not selling dollars – which might have been tough to explain to the US public. Yet the US reserves of the euro are finite – just a total of $26bn split equally between the US Treasury’s ESF and the Fed’s SOMA account.
If US Treasury Secretary Scott Bessent was correct in showing reporters plans to buy $5-10bn worth of yen, then the US might just have sold a third of its euro reserves. We suspect EUR/JPY trades at the lower end of its 180-185 range now, but do not see the case for much lower levels. Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts EUR/GBP: Important reversal Spot One month bias 1M 3M 6M 12M EUR/GBP 0.8572 Neutral 0.86 0.87 0.88 0.90 EUR/GBP has steadily reversed from July’s low of 0.8455.
We discussed what was driving the move and why we think sterling gains do not last in this article . Policy differentials are a key driver here, where BoE tightening expectations should evaporate into year-end. In addition to slowing inflation driving the BoE view, so will UK GDP.
This typically slows in the second half – potentially a problem with faulty seasonal adjustments. And unlike the fiscal stimulus coming through in continental Europe, UK fiscal policy will tighten in 2027 as frozen income tax brackets snare more earners. A slightly weaker pound is favoured.
Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts EUR/CHF: Higher rate environment has been key driver Spot One month bias 1M 3M 6M 12M EUR/CHF 0.9331 Mildly Bullish 0.94 0.94 0.92 0.92 EUR/CHF has been grinding higher, and a big driver has been higher global interest rates – where US rates have dominated since June. The assumption here, helped recently by SNB sourced comments to Bloomberg , is that the Swiss policy rate of 0.00% will stay there until late 2027. Higher interest rates globally mean wider differentials against Switzerland and a weaker Swiss franc.
Given that we think the Fed will not hike and the ECB’s September hike will be reversed next summer, we think the EUR/CHF upside should be relatively limited – perhaps just to the 0.94 area. A more sustainable recovery requires solid eurozone growth and a larger ECB tightening cycle, which looks unlikely. Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts EUR/SEK: Unchanged profile Spot One month bias 1M 3M 6M 12M EUR/SEK 10.94 Neutral 10.90 10.80 10.70 10.60 We are keeping our EUR/SEK profile unchanged, still targeting 10.80 by year-end.
Our call for lower front-end USD rates and easing oil prices should favour SEK over EUR. And any renewed Treasury market volatility, such as after July’s FOMC, or a broader loss of confidence in US assets should add to the downside risks as asset repatriation to Sweden picks up. We see limited scope for a steeper EUR/SEK decline, however, as market pricing of 30bp for Riksbank tightening by year-end looks overly hawkish.
Inflation should stay subdued even after adjusting for temporary tax cuts, and inflation expectations remain firmly anchored around 2.0%. We do not expect any rate hikes this year. September’s Swedish election shouldn’t have a material FX impact.
The centre-left opposition remains ahead in the polls. Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts EUR/NOK: Carry can offset lower oil prices Spot One month bias 1M 3M 6M 12M EUR/NOK 11.01 Bearish 10.85 10.75 10.65 10.60 Oil’s rollercoaster is still making the near-term outlook for NOK quite uncertain. While our baseline remains for Brent to gradually decline to the low $70s by year-end, the rates backdrop should offset the negative impact on NOK.
We continue to expect one more 25bp Norges Bank hike this year. September remains our preferred timing, though August is a close call and markets may be underpricing the risk of a surprise move. A calmer global rates environment should support carry trades during the latter part of 2026, and Norges Bank is unlikely to declare the tightening cycle over before CPI shows clearer signs of easing.
Against this backdrop, we are revising our EUR/NOK profile modestly lower, now targeting 10.70 by the end of the year. Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts EUR/DKK: Larger September hike a possibility Spot One month bias 1M 3M 6M 12M EUR/DKK 7.4755 Neutral 7.47 7.46 7.46 7.46 The Danish central bank’s DKK0.7bn FX sale in June was not followed by any intervention in July, even as EUR/DKK remained on the strong side and touched an intraday high of 7.4768 on 17 July. That suggests policymakers are either becoming more comfortable with the current, still-mild DKK weakness or are reserving action for a larger rate hike in September, when the ECB is expected to deliver a 25bp increase.
The latter would be more aligned with pursuing a more durable solution to the medium-term upward drift in EUR/DKK. Otherwise, the central bank still has ample scope to intervene (FX reserves have climbed to $110bn). We still expect EUR/DKK to return to 7.460, though likely only in late 2026 or early 2027.
Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts USD/CAD: Loonie lagging in dovish Fed repricing Spot One month bias 1M 3M 6M 12M USD/CAD 1.4011 Neutral 1.40 1.38 1.37 1.36 A resilient jobs market has helped the CAD curve to keep borrowing hawkish expectations from the Fed. Markets are pricing in 15bp of Bank of Canada tightening by year-end. But Canada’s inflation outlook remains quite muted and we continue to forecast no rate increases before mid-2027.
Measures of core inflation undershot consensus and the 2.0% target in June. Despite the return of elevated energy prices in July, the risk of second-round effects remain broadly limited. We currently expect headline inflation to peak at 2.7% in 4Q.
We expect a dovish repricing of Fed rate expectations in the coming months: an environment that has historically disfavoured CAD relative to its G10 peers. Even so, broader USD weakness can still drive USD/CAD down to 1.38 by year-end. USMCA headlines remain a dormant tail risk for CAD.
Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts AUD/USD: End of RBA cycle not a big headwind Spot One month bias 1M 3M 6M 12M AUD/USD 0.704 Mildly Bullish 0.71 0.73 0.73 0.74 The CPI slowdown in June has reinforced our view that the Reserve Bank of Australia is heading into a prolonged pause. Nevertheless, with markets pricing only 12bp of tightening by year-end, the risk of negative front-end spillovers into AUD are more contained than for USD or NZD. Governor Michele Bullock’s latest comments also suggest a reluctance to close the door on further hikes too soon.
AUD also stands apart from some other commodity currencies thanks to stronger underlying fundamentals. Softer energy prices are a headwind, but Australia’s terms of trade are likely to remain well above pre-war levels even in a further de-escalation scenario, while carry remains particularly attractive on a volatility-adjusted basis. We expect AUD to be one of the stronger performers in the final months of the year.
Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts NZD/USD: RBNZ pricing looks too hawkish Spot One month bias 1M 3M 6M 12M NZD/USD 0.5877 Neutral 0.59 0.60 0.60 0.61 The Kiwi dollar has performed strongly of late, benefitting from the improved external environment and lingering hawkish expectations on the Reserve Bank of New Zealand. We expect the RBNZ to hike one last time this year in September to 2.50%, but a market currently expecting 3.25% by March 2027 may be disappointed by any lack of strong commitment to further hikes. We suspect two of the six RBNZ members were not fully aligned with the June hike, and the surprise rise in unemployment in 2Q (driven by a jump in participation rate) offers an argument to ease the hawkish tone in September.
We expect NZD/USD to be lifted in the coming months by lower front-end USD rates, but our dovish call on the RBNZ means gains could be capped around 0.600-0.605. Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts 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… 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…
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