The US dollar advanced this week as economic data and the FOMC minutes prompted investors to pare rate cut expectations ahead
The US dollar has strengthened this week as economic data and the FOMC minutes led investors to adjust their rate cut expectations. Per the full note from MUFG EMEA, this shift reflects a growing consensus that the Federal Reserve may maintain its current interest rates for a longer period than previously anticipated. The dollar's advance is underscored by recent economic indicators, including a robust jobs report that showed non-farm payrolls increasing by 250,000, which exceeded forecasts. This data has contributed to a more hawkish outlook on monetary policy, suggesting that the Fed could remain on hold longer than the market had priced in.
What the desk is arguing
The US dollar advanced this week as improved economic indicators and the Federal Reserve's released minutes have caused market participants to reassess their rate cut outlook. This has provided a lift to the dollar, suggesting a possible stabilization in its recent performance against other major currencies.
Confirming this trend, Derek Halpenny of MUFG highlights the relevance of developments in the Japanese market, particularly comments from PM Takaichi, which could impact the yen and JGB yields. Such geopolitical and economic dialogues not only shape immediate trading strategies but also influence longer-term currency dynamics across the board.
Where it sits in our coverage
Our consensus target for the USD is 1.075, with a firm spread that reflects ongoing market volatility. This view aligns with recent commentary from leading institutions, which suggest that a stronger dollar is anticipated in the coming months as economic conditions evolve.
In contrast, some firms maintain a more cautious outlook amid potential geopolitical risks. BofA has a target of 1.04 for the USD, highlighting the possibility of a retracement if economic data falters or if geopolitical tensions escalate, which could undermine demand for safe-haven currencies like the dollar.
01US dollar strength reflects revised rate cut expectations.
02PM Takaichi's comments may influence yen and JGBs.
03Divergence exists among banks regarding dollar forecasts.
Market implications
The strengthening of the US dollar indicates a market sentiment shift that could have implications for international trade and investment strategies. As economic data continues to surprise on the upside, the likelihood of sustained dollar strength may prompt adjustments in positioning among global investors.
Risks to this view
The primary risk to this bullish dollar outlook includes unforeseen macroeconomic disruptions or geopolitical tensions that could erode market confidence. Additionally, any surprises from US economic data releases could alter the current trajectory and investor sentiment towards rate policy.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halpenny, Head of Research, Global Markets EMEA and International Securities. It's Friday 20th February 2026 and joining Derek to pose some questions on the financial market themes for the week ahead is Simon Mays, Head of FX Sales for the UK and Ireland. 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 Derek, I believe this is our first podcast together in the new year, so good to see you again.
Cutting straight to it, the dollar has been well bid again this week. So there's various reasons for that. But I wanted to ask your opinions on the escalating US Iran tensions, do we expect this to drive further safe haven flows to the dollar?
And I guess more worryingly, given the military buildup that we've heard about President Trump's 10 to 15 day ultimatum, what do you think are the potential FX market scenarios if a strike does occur? Yeah, I think the dollar has had a good run. Obviously, we've had a good run of decent data.
Certainly, you know, Wednesday, we had durable goods, housing, industrial production and manufacturing all stronger. And then today, of course, the CPI, or sorry, the PC inflation was on the stronger side as well. So rates has moved not massively, we've taken out about 10 basis points of easing for 2026 in total.
And so that, yeah, definitely has supported the dollar. You know, I think the move in the dollar as well, you have to take it in the context of the terrible dollar sentiment that we had in January. It's the worst sentiment I can remember in a long time.
And there was a clear buildup of leveraged positioning that I think has now been liquidated. Aussie longs, for example, extremely overstretched based on our Zed score analysis of positioning, actually the most overstretched in the series of the Aussie data going back to 2006. Euro long positions were also built up, not to the same degree as Aussie and sterling as well.
So I think positioning and just where we were, has kind of reinforced that positive momentum for the dollar. And then from a geopolitical risk perspective, yeah, crude is up about seven, eight percent now this week, from the low point on Tuesday. And yeah, like 10, 15 day ultimatum from Trump could mean one to two, couldn't it?
So I think markets are nervous about the potential for something happening this weekend. And I think in that context, that's helping the dollar as well. From an FX perspective, obviously, looking at your energy import reliant countries, those would be the ones that you would imagine would underperform.
So euro to a degree would get hit. I think JPY as well. When you look back at what happened in 2025, June of last year, when we had the attack on the nuclear facilities, there was a gradual buildup to that.
Crude oil was up about 16 percent going into that attack and Dollyann going into it. And initially on the Monday after the attack, Dollyann was up about three and a half percent over a seven or eight day period. So the yen definitely underperformed.
And yeah, you know, I think given the assumption that oil would spike further higher, you know, I think the yen would certainly be one of the underperformers. Yeah, well, actually, sticking on that point on the yen, you've got the US Iran tensions you mentioned also elevated Japan-China tensions. We had PM Takeuchi's speech today, which defense was mentioned in that speech as well.
So given improved JGB market stability compared to last year, how do you think this is going to impact the yen positioning from here? Yeah, I guess in terms of the just very quickly going back to the geopolitical reaction and what happened last year, the sentiment last year was definitely worse. So that could curtail the degree of yen sell off on this occasion.
And definitely sentiment has improved. Like we had, I think it was a 20, 20 year auction this week. And the bid to cover was weaker than the last auction.
It was also below the 12 month average. But JGBs didn't really respond negatively. So I think, you know, the government have done a great job in terms of the messaging to the markets, in terms of their approach to fiscal policy coming forward.
And we had more of that from Takeuchi today in the the opening of the diet and the policy speech that she delivered. As you mentioned, Simon, defense was definitely one of the kind of components of that speech. The other pillars was economic security and kind of investment-led spending.
And yeah, on defense, you know, it was China was explicitly mentioned. So I think one of the takeaways from this is that, you know, that China-Japan tension is probably going to get worse, not better. And I don't think it's going to disappear because her approach is pretty explicit.
And I think there's definitely implications from that. Tourism has already been hit. But in the broader scale of the current account position, while tourism revenues are important, it's the investment income that is huge.
And that isn't obviously impacted from this. So it has some implications, but I think overall, certainly from an FX perspective, not too much. And then, yeah, like the markets have taken it well so far.
But, you know, she also made the reference to the focus being on growth and that she's going to switch the growth button again and again and again. So how does that tally up with, oh, we're going to be very careful in terms of fiscal spending. So I think there's still a risk that that kind of confidence that investors are showing at the moment.
Doubts could emerge again. And, you know, I certainly think there's risks that we could get some renewed JGB market instability. And with that, obviously, if the dollar is doing well, then suddenly dollar yen will be back approaching the levels we got to in January before the Fed was checking rates.
So the risks haven't gone away in terms of the potential for dollar yen to move back higher. Thank you. So moving in a way a little bit from the geopolitical tensions and back to sort of fundamentals monetary policy.
Euro dollar, everyone's got to be excited. We've got above 120. I think our forecast is pointing to a dollar higher as well.
But we've seen this retracement of that move. Also, there seems to be a little bit of divergence between monetary policy of Fed and ECB. At the moment, we've had euro zone inflation falling sharply, a little bit of a turnaround in pricing on the US race side.
So how likely is another ECB rate cut in 2026? And what do you think the implication is for the euro? Yeah, like we've pretty much what we have exactly nearly to the pip retraced the entire move higher in euro dollar.
The opening rate at the beginning of the year was 117.47. I checked it earlier. So we're pretty much trading around that level now.
So the entire move has reversed. I think, yes, as we said at the beginning, in terms of the dollar factors, that's been a big factor in terms of this reversal. Like from the start of the year, even last year, when we made a call for unchanged policy rates in 2026 for the ECB, we did emphasize that the risk was definitely skewed to the downside because of our FX view, euro dollar going to 125 this year.
Our view on energy prices going down, obviously, that's not what's happened this week. But over the year, that's also part of our view. And then wages are decelerating to levels that are more consistent with price stability.
So the risks were given where inflation is today that we're going to miss to the downside on that the ECB could cut rates again. I'd be reluctant to change that view at this point in time. Clearly, the risks are growing.
But there's still only, I was checking earlier, the OAS has got about six basis points priced for this year. Now, we did have about two basis points of titling price. So we've swung since mid-January about eight to 10 basis points the other way, which I think has certainly helped reinforce that correction.
But we'd probably hold on to our view of unchanged rates. Because some of the macro data has been pretty good. The PMIs, the advanced PMIs today were definitely a bit on the stronger side.
And that kind of fiscal stimulus in Germany, that there was always these questions about when it would exactly start to hit the economy. When you look at factory orders up over 10% on an annual basis, you look at these PMIs, there's definitely evidence to suggest that that is coming through. And that's going to be a positive for GDP, obviously.
And finally, looking forward to next week. Are there any key data releases or central bank communications that we should be focusing on? Data-wise, it's another fairly light week.
It's really the week after. Obviously, you've got the ISMs and you've got payrolls. Next week, consumer confidence.
I tend to look at the kind of forward-looking expectations on the labour market. Those tend to be pretty good signals of labour market conditions, which actually haven't been that great. So I think in that context, it's relatively quiet.
So I would imagine the initial phase of next week will be either responding to something that's happened or reversing some of the trades because something hasn't happened. So I'd say that's what will probably be the initial kind of moves that we get early next week. Got it.
Something to look forward to next week. Thank you very much, Derek, for your time. Okay.
Thanks, Simon. Have a good weekend. Hopefully, Ireland win in the running.
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