Our latest views on the major central banks
The desk acknowledges the potential shift in monetary policy landscapes shaped by central bank communications, particularly from the Federal Reserve and the European Central Bank. Per the full note , recent statements from Fed Chair Kevin Warsh point towards a heightened likelihood of a rate hike, indicating a pivot from a previous stance of inaction to one of potential tightening. This is further underpinned by the ECB's resilience amid geopolitical tensions and its track record of advocating for rate hikes. As markets grapple with these shifting narratives, maintaining focus on FX pairs like EUR/USD, GBP/USD, and USD/JPY will be crucial as we anticipate a slow rate hike trajectory through the rest of 2026.
What the desk is arguing
The desk sees a pivotal moment ahead, with rate hikes likely from both the Federal Reserve and the ECB looming on the horizon. This sentiment is bolstered by increasing inflation pressures and a labor market showing resilience, particularly in the US where inflation expectations remain elevated despite some mixed economic indicators. Quoting specific sentiments from the source, the prevailing view now reflects a readiness to hike rates barring compelling data to support a pause.
Evidence in the form of Chair Warsh's comments, alongside ECB members' past advocacy for rate hikes, further solidifies this stance. With inflation exceeding desirable benchmarks and employment at full levels, conditions appear ripe for at least one more rate hike, likely at the September meetings for both the Fed and ECB.
Where it sits in our coverage
For the EUR/USD pair, our internal consensus stands at 1.1700, with forecasts ranging from 1.1200 to 1.2000 among firms. Key targets include RBC at 1.2000 and Morgan Stanley at 1.2000 for March 2026, suggesting that our call aligns with the upper spectrum of current expectations.
This perspective on potential rate hikes diverges slightly from the broader consensus which indicates a more cautious approach to hikes potentially being spaced out instead of a more aggressive monetary stance.
How other firms see it
Aligned with our view, firms like ING and RBC see the EUR/USD meeting targets that reflect an overarching belief in rate hike trajectories. Conversely, Nomura and Danish Bank reflect a more reserved forecast, projecting targets down towards the 1.1200-1.1866 range for March 2026.
A keen observation of how the USD/JPY might respond to these developments is warranted; as the Fed’s tightening becomes more pronounced, USD valuations could strengthen, propelling JPY considerations in turn, particularly under Bank of Japan stance adjustments.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Federal Reserve's likely rate hike is gaining traction in light of inflation data and current labor market conditions.
- 02European Central Bank shows surprising resilience, with both inflation and growth factors suggesting a rate hike is feasible soon.
- 03Market expectations are coalescing around the potential for rate increases from both the Fed and ECB in the near term.
- 04FX traders should prepare for volatility around upcoming rate announcements, particularly for EUR/USD and USD/JPY pairs.
Market implications
Keep an eye on the EUR/USD as it tests crucial thresholds around 1.1700, particularly ahead of possible Fed and ECB decisions. A successful breach or failure around these levels could indicate broader market positioning ahead of September's pivotal meetings.
Risks to this view
Should upcoming labor data or inflation reports undercut the Fed's current narrative, a reversal in their policy outlook, particularly a delay in rate hikes, could lead to significant shifts in the EUR/USD and GBP/USD dynamics. Furthermore, unexpected geopolitical developments could also derail ECB and Fed tightening momentum.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Goldman Sachs | Bearish | 1.1200 |
J.P. Morgan | Bearish | 1.1300 |
UOB | Bullish | 1.1800 |
Articles Our latest views on the major central banks Published 11:41 United Kingdom Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Our take on what could be next for the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan over the coming months James Knightley , Carsten Brzeski , James Smith and Chris Turner Federal Reserve We had been in the camp that felt the Fed could wait it out and inflation would return to 2% within the next 12 months. However, Chair Kevin Warsh’s Jackson Hole speech suggested he is minded to take action, given inflation has run too hot for too long in an environment of full employment and where he suggests financial conditions aren’t especially tight. We don’t think anyone on the FOMC is hostile to the idea of a rate hike and, as such, we are now in an environment where it seems as though the Fed’s position is to hike rates, unless the data justifies a pause, versus the previous position of holding rates steady unless the data justifies a hike.
This suggests a 16 September rate hike is now the most probable outcome. Given our macro view of tepid job creation, on-trend growth and cooling inflation, we see this as a risk management move rather than the start of a series of hikes. European Central Bank The stage looks set for another rate hike at the ECB's September meeting.
Not only because some ECB members actually advocated for a rate hike at the July meeting, but since the July meeting, the eurozone economy has shown an almost unexpected resilience to the war in the Middle East. This is partly due to good luck and to Asian competitors being hit harder by the closure of the Strait of Hormuz and losing orders to European competitors, but also to long-announced fiscal stimulus. At the same time, headline inflation has continued to edge higher, even if other inflation measures like core and services currently provide no reason to panic.
With oil prices remaining elevated and the risk of a fresh gas price shock increasing, most ECB policymakers are likely to see the case for another rate hike. Even if the ECB doesn’t like the term, the second rate hike this year would also fall into the category of ‘insurance rate hike’, or maybe more to the central bank's liking: a rate hike to strengthen its credibility and to preempt any possible indirect or even second-round effects from the current energy price shock. Bank of England We think the bar is still relatively high for a Bank of England rate hike.
Markets are pricing three by next summer. While three of the nine-strong committee voted for a hike in July, the remaining six look fairly embedded in the ‘on hold’ camp. It was telling that Claire Lombardelli, the most obvious candidate to join that hawkish group, said that it wasn’t a difficult decision to vote for no change at the last meeting.
Sources & References
How we cover this story
Related news on this pair
EUR/USD Price Forecast: 20-day EMA acts as key support level
Euro: Trading near 1.16 against US Dollar as yields rise – Danske Bank
Rising yields typically reflect stronger growth or hawkish policy expectations; EUR/USD pressure at 1.16 suggests USD strength from higher US rate premia.
Euro: Downside risk persists toward 1.1550 against US Dollar – UOB
EUR/USD downside bias toward 1.1550 signals technical weakness that may reinforce USD strength positioning in short-term trades.