MUFG: Dollar set to extend gains as Warsh Fed signals hawkish shift on inflation
The desk believes that the US dollar will continue its upward trajectory, supported by recent hawkish signals from the Federal Reserve and stronger-than-expected inflation data. Per the full note from MUFG, the dollar surged 1.4% last week, its most significant gain since the onset of the Iran conflict, driven by elevated CPI and PPI numbers and rising yields. The market is adjusting to the leadership transition at the Fed, with Kevin Warsh's upcoming remarks anticipated to play a crucial role in shaping expectations around future rate hikes, reinforcing the dollar's strength against potential market headwinds.
What the desk is arguing
The desk predicts an extension of dollar gains as market sentiment shifts with the Federal Reserve's new leadership under Kevin Warsh. This comes after inflation data significantly exceeded expectations, creating a robust environment for continued dollar appreciation, as highlighted in the MUFG research note.
Support for the dollar stems from several recent economic indicators: Brent crude oil prices surged nearly 8%, compounded by a backdrop of rising CPI and PPI figures that signal persistent inflationary pressures. As Warsh's hawkish stance on inflation takes hold, there's potential for further rate hikes, which would positively impact the dollar's valuation.
Where it sits in our coverage
Our current consensus target for the USD is at 1.075, with a range stretching between 1.04 and 1.12. Specifically, jpmorgan has set a target of 1.10 with a March 2026 timeframe, while bofa has a lower outlook at 1.04 for the same period.
This bullish perspective aligns closely with the higher end of the forecast spectrum, suggesting that our outlook reflects the prevailing bullish market sentiment and inflationary concerns underscored in the recent MUFG analysis.
How other firms see it
Analysts at firms like jpmorgan and citi share a positive outlook on the dollar, reinforcing our position on the currency as economic conditions shift. On the contrary, bofa maintains a more conservative view, reflecting concern for potential headwinds that might impede dollar growth.
Key related market indicators include US inflation trends and Fed policy adjustments, which will be critical in evaluating the USD's trajectory moving forward. The upcoming remarks from Fed chairman Warsh will likely serve as an inflection point for the currency's performance in the near term.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The US dollar is poised for further gains as inflation pressures mount and the Fed shifts to a more hawkish stance under Kevin Warsh.
- 02MUFG highlighted a 1.4% rise in the dollar last week, marking the most substantial weekly performance since the initiation of the Iran conflict.
- 03Expectations of future rate hikes are likely to bolster the dollar, especially following Warsh's first public comments as Fed chair.
- 04Elevated Brent crude prices and stronger-than-anticipated inflation data create a toxic environment for bonds, affecting dollar dynamics.
Market implications
Traders should keep an eye on the 1.075 resistance level for the dollar, particularly as commentary from Fed chair Warsh could catalyze significant market movement. A sustained dollar rally could emerge if further rate hike expectations are factored in following his remarks.
Risks to this view
Should inflation data unexpectedly soften or if Warsh's comments signal a more dovish outlook than anticipated, it could undermine the dollar's recent momentum and provoke a correction. Additionally, geopolitical developments, especially related to the Iran conflict and oil supply dynamics, pose a risk to the dollar's strength.
MUFG says the dollar posted its best week since the Iran conflict began as hotter-than-expected inflation data, rising yields and the arrival of hawkish Fed chair Kevin Warsh combined to shift market rate expectations. Summary: MUFG research note. The dollar rose 1.4% last week, its largest weekly gain since the outbreak of the Iran conflict in early March The move was driven by a toxic mix for bonds: Brent crude up nearly 8%, Hormuz still closed, stronger-than-expected CPI and PPI prints for April, and the transition to new Fed leadership Kevin Warsh has begun as Fed chair, though he is yet to be sworn in, temporarily extending Powell's term; Powell stays on as a governor Steve Miran is stepping down to accommodate the new leadership structure, with the board of governors seen shifting in a more hawkish direction Miran indicated enthusiasm for expected changes under Warsh, including revisions to forward guidance, market communication and balance sheet policy MUFG flags Warsh's first public remarks as chair as the key near-term risk event, warning that any hawkish signal on inflation could prompt further rate hike pricing and additional dollar strength The US dollar recorded its strongest weekly performance since the Iran conflict erupted in early March, rising 1.4% against a backdrop of hotter inflation data, a still-closed Strait of Hormuz and a consequential shift in Federal Reserve leadership, according to MUFG.
The bank's analysts described last week as a damaging combination for bond markets. Brent crude advanced by nearly 8% as the Hormuz closure showed no signs of resolution, while April's CPI and PPI releases both came in above expectations, reinforcing the view that the conflict is already feeding through into US consumer and producer prices. Against that backdrop, the arrival of Kevin Warsh as Fed chair added a further hawkish dimension to a market already reassessing its rate assumptions.
Warsh has not yet been formally sworn in, meaning Jerome Powell's term has been extended on a temporary basis. Powell will remain on the board of governors once the transition is complete. To facilitate the new leadership arrangement, Steve Miran is stepping down from the board, a move that MUFG notes tilts the overall composition of the governors in a more hawkish direction.
Miran, in departing, expressed support for the changes expected under Warsh, which are anticipated to include revisions to how the Fed communicates with markets, adjustments to its forward guidance framework, and a rethink of balance sheet policy. The market's reaction to the combined inflation and leadership shift was sharp. The 2-year Treasury yield jumped 19 basis points over the week, closing above 4% for the first time since June of last year.
The interest rate swaps market now fully prices a 25 basis point rate increase by the March 2027 meeting, a notable hawkish repricing that reflects both the inflation data and uncertainty about Warsh's policy instincts. MUFG identifies Warsh's first public remarks as Fed chair as the single most important near-term event for markets. Any language suggesting heightened concern about inflation risks would be sufficient to accelerate rate hike pricing further and provide additional fuel for dollar strength.
That scenario, the bank argues, represents the most immediate upside risk for the currency from current levels. --- The 2-year Treasury yield breaking back above 4% for the first time since last June is a technically significant moment that validates the dollar's renewed bid and signals markets are repricing the Fed's reaction function under Warsh. With a 25bp hike now fully priced by March 2027 in the OIS market, the bar for further dollar upside is relatively low: any hawkish inflection in Warsh's debut public remarks would be sufficient to bring forward that pricing and push yields higher still. For oil, a stronger dollar creates an additional headwind for crude prices even as the Hormuz closure continues to support the supply-side bid.
This article was written by Eamonn Sheridan at investinglive.com.
Sources & References
How we cover this story