Is the coast clear for further USD strength?
The desk posits a favorable outlook for the USD, with potential for further strength following the upcoming U.S. CPI report. Per the full note from MUFG EMEA, the market is cautiously optimistic that recent economic data will maintain the USD's upward momentum, particularly if the CPI exceeds expectations. This comes amid a backdrop of a likely Fed decision to keep rates on hold, with a delay in any further hikes until December 2026. Considerable attention will be on the CPI data due next week, as it will shape expectations for future monetary policy.
What the desk is arguing
The desk supports the idea that the USD could continue its rally, especially with the anticipated U.S. CPI report for September serving as a potential catalyst. Recent data has given the Fed some room to pause on rate hikes, with softer readings such as the PCE deflator indicating moderating inflation pressures. This context aligns with MUFG's view that the dollar's strength might be sustained through the week ahead.
With expectations for the Fed to keep rates unchanged this month, the potential for a surprise upside in the CPI could quickly change market sentiment. An unexpected increase in the CPI could prompt discussions of a rate hike sooner than anticipated, reaffirming the bullish sentiment around the dollar and potentially driving it toward new highs.
Where it sits in our coverage
Currently, the consensus target for the USD is 1.075, with a range between 1.04 and 1.12. Key forecasts include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) The desk's expectation for continued USD strength aligns closely with jpmorgan's bullish target, positioning at the upper end of our tracked range. Conversely, bofa maintains a more cautious stance, anticipating a weaker USD.
How other firms see it
Several firms, including jpmorgan, view the potential for further USD strength as probable, while bofa diverges, forecasting a weaker dollar scenario. This contrast underscores varied interpretations of upcoming economic data.
The direction of the EUR/USD pair will likely reflect market reactions to the U.S. CPI data, given tight correlations between dollar strength and euro movements, especially in light of the ECB's own cautious rate stance.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The USD is poised for potential further strength driven by the upcoming U.S. CPI report.
- 02Recent economic data suggests the Fed may delay additional monetary tightening until December.
- 03An upside surprise in CPI could speak to renewed expectations for a rate hike, turbocharging dollar demand.
- 04Consensus targets reflect a mix of bullish and cautious outlooks among various financial institutions.
Market implications
Traders should focus on the upcoming U.S. CPI report scheduled for release next week, as it may catalyze market movements, especially if the results are stronger than expected. A significant move above the 1.075 level could see further bullish positioning in the USD.
Risks to this view
A significant downside surprise in the CPI could raise questions about the Fed's path forward, potentially derailing the bullish momentum for the USD. Should inflation appear to cool more than expected, markets could rapidly adjust to the prospect of prolonged low-rate conditions.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst. It's Friday, 9th October 2026, and joining Lee to pose some questions on the financial market themes for the week ahead is Abdullahad Lockhart, Currency Analyst. 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 Abdullahad. So we've seen that the dollar continues to trade closer to year to date highs over the past week. Do you expect the dollar to strengthen further in the week ahead?
Yeah, like you say, it's definitely been a good run for the dollar over the last couple of weeks with the dollar hitting fresh year to date highs against most major currencies and that kind of strong dollar momentum. We do think that's likely to remain in place going into next week. The kind of key events to watch over from the dollar side of things is the U.S.
CPI report for September released next week. That's going to be watched closely as the market tries to kind of reassess the outlook for Fed policy. Our view is that we think it's definitely looking more likely now that Fed will leave rates on hold this month and kind of delaying the next rate hike until the end of this year in December.
Definitely the latest data from the U.S., the softer PCE deflator report and NFP report have given the Fed kind of more room to keep assessing their situation before hiking rates further. Having said that, though, if we did see a significant upside surprise in next week's U.S. CPI report, it could potentially put an October hike back onto the table, which could definitely add to the dollar's upward momentum.
And then at the end of the week, we also have Fed Chair Kevin Walsh speaking at the IMF annual meetings in Thailand. He hasn't spoken since the last Fed meeting when the Fed hiked rates for the first time in September. So those comments from Walsh will be watched very closely in the week ahead and will potentially be impactful for U.S. rate expectations and dollar direction next week.
But increasingly, as we've seen over the last couple of weeks, the dollar is being driven more by developments outside of the U.S. now, in particular, the increased risk of a more prolonged energy price shock. And alongside that, the move higher that we're seeing in global bond yields, particularly in France, that is contributing to an even stronger dollar in the FX market. As we've seen over the past week, the market is definitely struggling to maintain confidence in the fiscal outlook in France.
We've seen the 10-year government bond yield at the end of last week rose up close to 5 percent and the spread over German bonds has blown out to the highest level since the worst of the eurozone debt crisis in 2011, which is signaling very clearly that there is a significant loss of confidence there in the government's fiscal plans and the government's budget plans for next year. While we've obviously seen the details of those plans, those haven't been sufficient to reinstill confidence in French government debt. And at the moment, there isn't really a kind of clear catalyst on the horizon, which we think could turn around, bear a sentiment towards French government bonds and the euro.
And if we look at price action over the last couple of weeks as well, we can see clearly that euro selling has become more broad-based, not just against the dollar, but also against other European currencies as well. So to us, this kind of setup leaves the euro vulnerable to further weakness in the near term. And like I say, it's difficult to see what's going to turn around right now.
Like one potential positive catalyst would be if we were to see a deal between the US and Iran to end the conflict and if energy prices were to fall significantly, that could definitely help to ease downward pressure on the euro and also on French bonds. But for now, that's looking unlikely ahead of the midterm elections in November. So Abdullah Haddad, I know you're here as well, and you've been kind of looking into past periods where we've seen the euro underperform, going all the way back to 2011, 2012, when we had the eurozone debt crisis.
Be interesting to hear if you have any kind of important kind of takeaways for the listeners. Yeah, surely. Thank you.
So this week, the euro weakness has become increasingly broad-based, pushing our framework into what we classify as a severe euro weakness regime. But one more interesting finding from my analysis is not necessarily what happened to Swissy during the initial shock, it's what happened after. So our framework looks across G10 euro crosses and combines two measures, the breadth of euro weakness and the magnitude of those relative to its history.
Severe episodes occur when at least 75% of all euro crosses decline and euro pressure falls into the bottom 10% of its rolling one-year distribution. So historically, Swissy does not stand out as a major winner during the initial euro weakness week. In fact, Swissy's average relative return during the euro weakness is broadly flat.
But the pattern changes once we move beyond the initial shock. Over the subsequent four weeks, Swissy has historically delivered around 0.7% of average relative outperformance, and this is statistically significant. And that rises approximately to 1.1% over 13 weeks, which is also statistically significant.
So this suggests that the Swissy's response to euro weakness is typically delayed rather than immediate. That distinction is important. Much of the initial effects adjustment occurs during the week in which euro weakness is identified.
Swissy, however, appears to become more important during the subsequent rotation and the initial market response begins to fade. So the episode level analysis also shows that this is not a uniform outcome. Individual historical Swissy returns vary considerably, and several periods have been produced negative per-shock performance.
There's also been unusually high Swissy moves, meaning that the average should not be interpreted as a guaranteed return. Nevertheless, the broader pattern is interesting. Rather than viewing Swissy simply as an immediate beneficiary of euro stress, the historical evidence suggests its relative stress has tended to emerge progressively after euro weakness episodes.
So for investors, that makes Swissy potentially more relevant as a post-shock rotation signal, meaning Swissy bias to the upside. All right. Thanks for that update, Abdulhad, and that brings an end to today's podcast.
Thanks, everyone, for listening, and have a good week ahead. Thank you for listening to this MUFG Global Markets podcast. Rate, review, and subscribe.
Contact your MUFG sales rep for more information. Come back next week for more insights from the Global Markets research team.
Sources & References
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