What's takeaway 1 on US dollar to stay firm as volatility rises?

US dollar likely to remain strong amid rising volatility and inflationary pressures.

What's takeaway 2 on US dollar to stay firm as volatility rises?

Expectations for a rate hike in December are nearly fully priced in by markets.

← Commentary feed2026-10-16 15:51Z

MUFG EMEA

US dollar to stay firm as volatility rises

The desk anticipates continued strength in the US dollar amid rising market volatility and potential upward pressure on interest rates. Per the full note from MUFG, the recent US CPI readings have led to a market pricing in further Federal Reserve tightening, suggesting that solid inflation data may trigger back-to-back rate hikes early next year. With the current volatility dynamics, the dollar could strengthen against commodity and emerging market currencies, benefitting from a more risk-averse global investor sentiment.

What the desk is arguing

The dollar is expected to remain firm as market volatility increases and rate hike expectations build following stronger-than-anticipated inflation data. Per the full note from MUFG, the Fed's current positioning is likely to shift towards a tightening scenario, especially if November's inflation readings come in stronger than expected.

Current market consensus shows that a 25 basis point hike in December is nearly a certainty, with further adjustments anticipated for the first half of 2027 if inflation data continues to perform positively. A strong November CPI could push market expectations for back-to-back rate increases, altering the pace of monetary policy significantly.

Where it sits in our coverage

Our consensus target for the Euro to Dollar pair is 1.075, with a range of 1.04 to 1.12. Notably, jpmorgan has a target of 1.10 for March 2026, while bofa is more cautious, placing their target at 1.04 for the same period.

This perspective aligns well with the prevailing cross-firm consensus, particularly within our coverage on potential inflation impacts. The desk's stance is slightly on the upper end of the forecast spread, reflecting confidence in dollar strength based on consistent inflation trends.

How other firms see it

The majority of firms are aligned with bullish sentiment toward the US dollar, with an emphasis on the potential for further rate hikes. However, bofa takes a more bearish stance, indicating a lower target based on their assessment of inflation pressures.

Expect movements in currency pairs like EUR/USD, which is closely tied to the upcoming economic indicators, particularly the US CPI. The USD/JPY relationship will also be worth monitoring, as it often reacts to sentiments around US monetary policy shifts.

How firms align with this view

consensus1.0750range1.0400–1.1200

Aligned with the desk view

JPMMar26 1.1000

Contrary positioning

BofAMar26 1.0400

Key takeaways

01US dollar likely to remain strong amid rising volatility and inflationary pressures.
02Expectations for a rate hike in December are nearly fully priced in by markets.
03Potential for additional tightening if November CPI data exceeds forecasts.
04Market sentiment is shifting towards risk aversion as volatility rises.

Market implications

Traders should watch for any significant movement in US CPI data leading up to the Fed's December meeting, which could reinforce the dollar's strength. Key levels to monitor are 1.075 for EUR/USD, as a breakdown below this could indicate more aggressive dollar strength.

Risks to this view

A deviation from expected inflation data, particularly a significant drop in November's CPI, could undermine the dollar's strength and lead to a reassessment of rate hike expectations, reversing the current bullish narrative.

MUFG

Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halpeny, Head of Research Global Markets, EMEA and International Securities. It's Friday 16th October 2026 and joining Derek to pose some questions on the financial market themes for the week ahead is Simon Mays, Global Client Sales. 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, always good to see you.

And you Simon? This week, let's think about what happened this week. A lot of the excitement I think was on Wednesday, obviously around the US CPI data.

Some big moves, but they were fairly short live moves in both FX and in rates. And now the Fed's October meetings pretty much largely priced as a hold again, but a deck hike fully priced. Looking forward, if November data, so the CPI and non-farm payrolls comes in hot again, how would this alter rate going forward, do you think?

Well, I think obviously it would be into next year in terms of, you know, 25 is a done deal in December. I guess part of that question could be implying could they do something bigger in December? I don't think so.

They're not at that juncture in terms of having to be risk being perceived as being behind the curve, which is what that would be if they went by 50. So I don't think that that's necessary. There's 50 priced for next year up through to September.

So obviously what would happen is the pricing would start to indicate the potential for back to back moves and for more action in the first half of next year. I think that would be the first type of rate move on the back of a strong CPI in November. But yeah, like I think up to this point in time, Simon, like the figure this week was certainly on the stronger side.

There's no getting away from that. But you know, there's some of the PPI components that go into PCE, which of course is the official target. We're not indicating any notable uptick in the PCE, possibly 0.3, but you could feasibly get a 0.2 as well.

And, you know, the three month annualized core PCE inflation at the moment is at 2%. It's slowed pretty much since February when it peaked at 4.3%. Now, I know that's only a three month annualized rate.

If you take a six month annualized rate, it's higher. It's 2.7, I think. The point I'm making is, you know, we don't have a situation where the Fed have to rush.

We're already in restrictive territory. And it's how much more restrictiveness do they need to put in there? Although I accept that, you know, Warsh, for example, might not agree that we're in restrictive territory.

That's a bit of a debate. But we're, you know, work has been done and there's more that I think is needed in December. But we would certainly question whether we're going to get the 50 basis points next year.

Yeah, obviously, you've got to make assumptions about the Middle East and crude oil. But, you know, if we don't get any kind of nasty uptick from here, if traffic flows gradually improve even in the current status, I think there is scope for some softening next year, in particular in rents as well, which we think should decelerate a little bit further from here. If that plays out as you think, presumably, that leads to a softer dollar, in your view, next year.

Maybe you can elaborate on that a little bit. But also, what kind of impact do you think that would have on, you know, other rate sensitive EM currencies like the Korean won, for example? Yeah, like we still have a bias for the dollar to weaken next year.

Looking at kind of rate spreads and outright rate moves in the US, I could certainly see a scenario where DXY could get up, I think briefly, but could get up to around the 105 level. So, you know, that would imply a break of 110 on the euro. So on a scenario like what you mentioned, with a strong set of data in November and the markets pricing in more, that looks definitely very, very feasible, especially if the AI holds in rather than continues to sell off from where we are now.

And then, yeah, like AI is definitely having a much bigger influence when you look at certain currencies. And, you know, it's extraordinary what's happening in Korea. You know, we've had a 20% drop in the KOSPI just this month.

We're 40% down from the peak high in June. But since the beginning of the second half of this year, the Korean won is 16% stronger. So quite a dichotomy there.

What I would say is you look at the trade balance for South Korea, and it's extraordinary, the scale of increase in exports and the overall surplus of trade, which has now jumped basically fivefold since January when it was just under $10 billion. It's now in September recorded at $50 billion. Like if you look at it on a chart, it's off the scales.

And I just think that kind of corporate related flow, be it export revenues, be it repatriation demands for other reasons, taxation payments domestically in Korea, for example, other costs to the business in Korea, all of those kind of flows, I think, generally, obviously have been dominating the equity related outflows, which the data does show there has been. But yeah, I think ultimately, it's partly a rate story, but it's those flows in particular, the scale of exports and trade surplus that I think is going to be key for Korea going forward. And we do have the Bank of Korea next week.

We think they'll hold, but there's more to do and they will hike again at the next meeting in December. Thank you. Sticking in Asia then, but that's on the other side of things.

One of the main focuses overnight was Indonesia. We heard that the Bank of Indonesia intervened aggressively following the MSCI downgrade proposal for Indonesian equities. How sustainable was that intervention given FX reserve levels there?

And is there a risk of contagion to other ASEAN currencies if the pressure persists into next week? Yeah, definitely long Korea short Indonesia's trade and FX for sure. The status being changed potentially from emerging market to standalone, skipping frontier, that was certainly a surprise, the skipping of frontier.

But it has been an ongoing issue. There have been warnings about opaque shareholding structures and suspected coordinated trading, suspicious trading activities and therefore weak enforcement from the regulators in Korea. So it has been an issue for a while.

And I guess the surprise, as I said, was the aggressive scale of the step. In terms of reserve rundown, things are looking healthy-ish enough. They've got $146 billion worth of reserves.

The burn rate in the most recent month was about $170 million. So very small. Now, estimates suggest that index-related equity selling, if MSCI was to confirm this, would be about $6 billion.

When I look at the flows year to date on the equity side, there's been about nearly $5 billion worth of equity sales year to date. So this would be effectively more than doubling it potentially. But this has a way to go in terms of getting a confirmation.

And it's going to be, I think, next year before there's an announcement on that. But obviously, it doesn't help in terms of overall sentiment, especially if there's complaints about weak regulations and enforcements in Indonesia. Does it spread?

To me, it looks pretty Indonesia-specific. Obviously, if the dollar was to continue strengthening more broadly, that would certainly have some impact. But dollar CMI is the big influence here.

And there's nothing to suggest that the Chinese authorities are going to allow any kind of sharp move higher on dollar CMI. So in my view, risks are pretty small in terms of this having any kind of contagion impact. Got it.

Thank you. And lastly, I just want to focus on the UK. The pound sterling held up pretty well recently, despite a lot of talk of mounting evidence of UK consumer stress.

Credit card defaults rose for the sixth consecutive quarter, record consumer credit, and the off-gem price cap jump coming in January as well. So at what point does the market start potentially unwinding the current rate hike expectations? I think there's about 1% of rate hikes priced in for next year.

Yeah, it's kind of similar to the US view that we just spoke about. And obviously, there's actually more price from the Bank of England. So I would definitely be of the view that that's excessive.

But to answer your question in terms of when might there be a point when there's a repricing, it's very hard to envisage that over the short term when you just look at the overall global fixed income sentiment. Now, we have seen a retracement in yields of about 15, 20 basis points because of the AI-related sell-off. So if equity markets really took a drubbing from here, and by that I mean 5% to 10% over a relatively short period, then I think you would get some definite correction in terms of the current rate pricing.

If it's UK-specific, ignoring the global dynamics, I would say more compelling evidence of labour market weakness. Because the one thing the Bank of England officials have been acknowledging is that the pass through into domestically generated inflation is a lot weaker because of weak labour market conditions. So we have the jobs data next week.

Consensus on the HMRC payroll print is another negative. We're running at about 100,000 thousand job losses under that measure a year to date. So the labour market is definitely soft and it's putting some downward pressure on wage growth.

And if that was to become more compelling with, let's say, two to three consecutive months of much weaker data and slower wage growth, that to me could definitely change the dial. You could see a UK-specific repricing for next year. And I guess the budget, which we'll see how that plays out, but I wouldn't expect that to include too much in the way of tax hikes or aggressive spending cuts.

I think they want to try and hold the line as much as possible. And in that sense, I don't think it should be much in terms of a short-term rates repricing of Bank of England. It's an important event, but probably not for that.

Agreed. Yeah. Well, thank you very much, Dave.

Always good to speak to you. Thank you. And you.

Have a good weekend, Simon. You too. Thank you for listening to this MUFG Global Markets podcast.

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