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FX BANK FORECAST · COVERAGE
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Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 30 institutional desks. No promotion.
FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 30 institutional desks. No promotion.
The desk posits that the recent weakening of the USD is largely driven by optimistic developments in Middle Eastern geopolitics, particularly regarding potential negotiations between the US and Iran. Per the full note from MUFG EMEA, this optimism has buoyed global risk sentiment, contributing to a rally in equity markets and a decline in the dollar's value. Additionally, strong earnings growth from US corporates has not translated into dollar strength, as the Federal Reserve's current stance suggests a hold on interest rates. This aligns with our consensus target of 1.075 for the EUR/USD, reflecting a range of expectations from various firms.
MUFG analysts Lee Hardman and Seiko Kataoka Fisher argue that heightened risks emanating from the Middle East are contributing to the recent depreciation of the USD. This trend is compounded by speculation surrounding the potential effectiveness of Japanese government intervention in stabilizing the JPY, which has been under pressure against the dollar.
The analysts provide evidence that persistent geopolitical tensions have shifted investor sentiment, favoring currencies seen as safe havens. Furthermore, they posit that if Japan does proceed with intervention, while it may provide temporary relief for the JPY, it is critical for the broader market sentiment to stabilize to have lasting effects on USD performance.
Our current consensus target for USD/JPY is 1.075, resting within a range of 1.04 to 1.12. This outlook aligns with MUFG's perspective on potential vulnerabilities facing the USD due to shifting risk landscapes, albeit with varying interpretations of the intervention's immediate effectiveness.
In general, sentiment appears divided among major firms regarding USD performance amidst geopolitical tensions. Some analysts are more cautious, suggesting that external factors may play a more prominent role than domestic interventions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
Market implications
A weaker USD can lead to stronger Japanese exports, potentially stabilizing risk markets. However, the effectiveness of Japanese intervention could be limited, leading to ongoing volatility if geopolitical situations worsen.
Risks to this view
Escalation of conflicts in the Middle East and ineffective intervention measures pose significant risks for USD and JPY valuations. Additionally, divergence in monetary policy between the Fed and BOJ could further complicate the USD-JPY trajectory.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday 8th May 2026, and joining Lee to pose some questions on the financial market themes for the week ahead is Seiko Kataoka-Fisher, Director from Japanese customer sales for EMEA in London. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.
It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hi Lee.
Hi Seiko. We've seen the dollar weaken over the past week. What has been behind the alleged selloff?
Yeah, like you say, we've seen some further weakness in the dollar over the past week. And to us, the main trigger has been the renewed optimism that the US and Iran are moving closer towards a deal to try and end the war in the Middle East and to kind of gradually reopen the Strait of Hormuz over a 30-day period. At this point, there's still no kind of deal finalized, but we are waiting to see whether Iran will accept the terms of this deal, which has been proposed by the US.
The risk still is that, like you say, Iran may feel that it's more in their interest to prolong these negotiations. Obviously, the longer the Strait of Hormuz remains closed, the more the risks are that we could see disruption in energy markets and a bigger hit to the global economy. And that ultimately could mean that Iran is in a better position to get better terms in a deal with the US.
So that's still the risk, but the market is obviously very hopeful and optimistic that a deal can be reached sooner. And that improvement in risk sentiment has encouraged global equity markets to hit fresh record highs over the past week. Obviously, on top of the better news from the Middle East is also the strong earnings growth that we've seen for US corporates in Q1, with another quarter of double-digit annual earnings growth helping to boost investor sentiment.
And this improvement that we're seeing in global investor risk sentiment, like I say, that has been a key factor which has contributed to the weaker dollar. On the other side, we've seen the high beta G10 commodity currencies outperforming at the dollar's expense. The other thing that we've been watching as well today was the release of the latest payrolls data from the US.
That did provide some further reassuring news that the labor market in the US does appear to be showing tentative signs of improving at the start of this year. If we look at private employment growth in the first four months of this year, it's averaged around 90,000 per month, which is definitely a pickup from what we saw in the final four months of last year when private employment growth averaged about 35,000 per month. So it certainly should give the Fed more confidence that the labor market is stabilizing and there's not as much need now for them to lower rates further in the near term.
Normally, that would probably provide some support for the dollar. But at the moment, it's not really helping to strengthen the dollar. We don't think it significantly changes the near-term outlook for Fed policy.
The Fed have indicated that they're comfortable to keep rates on hold in the near term. And we don't think today's payrolls report really changes those expectations. We've also seen the US dollar weaken against the Japanese yen.
Do you expect stronger Japanese yen to continue? Yeah, well, let's move lower that we've seen in dollar-yen over the last couple of weeks. It's been mainly driven by what looks like intervention from Japan to support the yen.
If we look at the latest current account data from the Bank of Japan, that does appear to show that Japan has intervened on two occasions since the end of last month. Cumulative purchases look like they total around 10 trillion yen. That would be a similar amount of intervention to what we saw back in kind of late April, early May of 2024.
On that occasion, dollar-yen similarly had been kind of threatening to break above the 160 level. And then when the intervention took place, that pushed dollar-yen down towards the 152 level. But what happened in the following couple of months is that dollar-yen resumed its upward trend and eventually hit a new high of 162 in July 2024.
We think the story from intervention back on that occasion is that if there's no change in the fundamentals, then intervention from Japan is unlikely to reverse the yen weakening trend. We think on this occasion, we see some similarities. So, there is a good chance that the yen will resume its weakening trend if Japan stops intervening in the FX market.
Obviously, at the moment, the higher energy prices and higher yields outside of Japan, alongside improving investor sentiment, all of those factors are still headwinds for the yen. So, it's difficult to see the yen staging a more sustained rebound at this stage. Having said that, though, obviously, if the yen was to strengthen on a more sustained basis, we would need to see a change in the fundamentals.
And there is the possibility that we could see a change in the fundamentals, like if we saw a quicker deal to end the conflict in the Middle East and to reopen the strait, I think that would lead to a sharp fall in energy prices. If we saw the price of oil dropping back below, say, $90 per barrel, I think that would be a supportive factor for the yen. It would also make the US rate market more confident to price back in more Fed rate cuts, which, again, would be a supportive factor for the yen.
And then finally, on top of that as well, I think if we saw that uncertainty related to the Middle East developments, if that uncertainty was to fade, the BOJ have indicated clearly that then they would become more confident as well to resume rate hikes. So, in that scenario, you could see the BOJ hiking rates as well in June. So, in that sort of scenario of a quicker deal to end the conflict and reopening of the strait, that could mean that fundamentals also move more in favour of a stronger yen as well.
So, that would be, I suppose, the best case scenario for the yen in the near term. Thank you very much, Lee. Thank you.
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Come back next week for more insights from the Global Markets Research Team.
How we cover this story
Widening EUR/USD yield spreads in favor of eurozone assets suggests technical support for mean reversion; monitor if 10Y differential sustains above 100bp.
Strong eurozone data supports EUR/USD recovery within established range; watch for breakout confirmation above recent resistance levels.
Market positioning ahead of US NFP suggests EUR/USD vulnerability on stronger-than-expected employment data, which would support USD strength and widen Fed/ECB policy divergence.
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