USD downside risk increasing
The desk is increasingly concerned about the downside risks to the US dollar, particularly in light of recent developments in monetary policy and trade. Per the full note from MUFG EMEA, the dollar has weakened modestly, slipping less than 1% this week, which may signal a broader trend as the market digests the implications of Stephen Miran's appointment to the Fed Board of Governors. This shift could potentially influence Chair Powell's stance ahead of the upcoming US CPI data release on August 12, which is critical for gauging inflationary pressures and subsequent Fed actions. The desk believes that these factors could lead to further dollar depreciation in the near term.
What the desk is arguing
The risk profile for the dollar is skewing to the downside as recent trends indicate a modest yet persistent weakening. Given the significance of forthcoming CPI data and the implications of Stephen Miran's Fed appointment, market participants should brace for potential volatility that could further impact the dollar's valuation.
Supporting this bearish outlook, the dollar slipped less than 1% this week, signaling broader issues that may persist. Analysts are particularly noting the implications of tariffs implemented this past Thursday, which could dampen economic performance and provide further catalysts for dollar depreciation.
Where it sits in our coverage
Our current consensus target for the USD stands at 1.075, with a trading range anticipated between 1.04 and 1.12. This outlook is somewhat aligned with MUFG's recent analysis, which emphasizes growing concerns around the dollar's strength, particularly in light of external economic influences.
In contrast, other firms are setting varying targets for the upcoming months: - JPMorgan: 1.10 (Mar-26) - Bank of America: 1.04 (Mar-26) - Goldman Sachs: 1.08 (Dec-26) These perspectives illustrate a mix of cautious optimism and skepticism regarding the dollar's short-term resilience.
How other firms see it
Market sentiment is divided, with some firms echoing the bearish stance on the dollar. For instance, Citi expresses concerns around the Fed's tightening policy impacting the dollar's maintenance of value.
Conversely, other firms remain optimistic, positioning for a stronger dollar in the long run despite recent weaknesses. Notably, Nomura and Wells Fargo maintain forecasts aligning with a robust dollar outlook through early 2026. - Citi: bearish outlook - Nomura: bullish outlook - Wells Fargo: bullish outlook
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01USD is under increasing downside risk pressure.
- 02Upcoming CPI data could further affect dollar dynamics.
- 03The Fed's structural changes could introduce volatility.
Market implications
Investors should be alert to the potential for increased volatility in currency markets, particularly in response to evolving economic indicators such as CPI data. A weakening dollar could encourage a shift in capital flows and influence broader market sentiment toward risk assets.
Risks to this view
Key risks remain tied to inflationary pressures, trade policies, and inter-bank communications regarding monetary policy. Any surprises in the upcoming CPI data could catalyze significant market movements, thereby altering current forecasts for the dollar.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halperny, Head of Research, Global Markets EMEA and International Securities. It's Friday 8th August 2025 and joining Derek to pose some questions on the financial market themes for the week ahead is James Ralston, Vice President, FX Institutional Sales. The following podcast is intended for professional investors and eligible counterparties only, and not for retail clients.
Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Hi Derek. Thank you very much for joining us today.
I hope you've had a good week. There's a couple of topics that I wanted to talk to you about. I don't know really where to start.
There's a couple of things that we wanted to discuss, but maybe we start at the FED Musical Chairs. Would that be a good place to start? About Mirren maybe coming through?
Yeah, yeah, no, definitely. I think once we had the resignation of Adriana Kogler last week, that was definitely going to be a topic for this week. And yeah, I think Stephen Mirren coming in temporarily, I think you can look at it in two ways.
Number one, clearly he's an advocate of tariffs. Clearly he's anti the view that tariffs fuel inflation. So clearly he will be endorsing rate cuts as a board member.
And the Senate reconvenes on the 2nd of September. The meeting is the 16th, 17th. So there's a two-week period to get the confirmation.
I think that's doable. So I think ultimately Stephen Mirren could be in the chair on the board for four meetings. So does that mean there's more impetus that there's going to be a September push for a rate cut then?
Is that what you're leaning towards? Yeah, I think one way of interpreting it is definitely the odds of a September cut have gone up. If you assume Waller and Bowman vote again, you've got now three governors.
However, the influence from a market pricing perspective were practically fully priced for a September cut anyway. And other Fed officials have been moving in that direction since the payrolls report. So I don't think it adds much in the way of influencing price action over the short term.
The probability of more proactive pushes in general over those four meetings, because Stephen Mirren is there, is obviously that bit higher. So that's definitely dovish. The other interpretation though is that the fact that he's only putting Stephen Mirren in temporarily, it means that he hasn't put his permanent person in place there.
So therefore, Waller and Bowman are still in the running for getting the Fed chairmanship. And having, let's say, Christopher Waller, who now seems to be the favorite, is certainly better than Kevin Hassett in terms of Fed interference and the politicization of the Fed. So I think from a medium term perspective, Waller leading the Fed is good for the markets, even though he's calling for a cut.
And you could argue that decision or that call is politicized in some way. I think the markets would perceive him as being a bit more mindful of Fed independence than, say, Kevin Hassett. Does it lead to a change in that termination rate or the end point?
Does it mean that that's going to overall change medium to long term, or is it just the speed of what we're getting to? I think having Waller as Fed chair, ultimately, it's still just one vote. At the end of the day, the chair of the Fed has to bring the rest of the committee with him.
Now again, having Waller in the seat, he has credibility already because he's there. Kevin Hassett could have had a lot more trouble bringing the committee with him. So Waller may have more influence.
But of course, you would imagine that Waller won't be completely ignoring the data. And if the data shows that they shouldn't be cutting, I'm sure he'll move in that direction. So yeah, I think overall, I think the main takeaway is that an FOMC led by Christopher Waller is better than being led by Kevin Hassett.
Of course, the two Kevins are still in the running. Kevin Walsh is better than Kevin Hassett. But I think Christopher Waller, he seems to be, certainly compared to a week ago, he seems to be in a better position.
Yeah. Okay, great. And then if I could sort of jump across, and you sort of touched on it, that Marin is also an advocate for the tariffs.
There's still a lot of stuff going on with the tariff world. Even today, I was running through the different sort of touch points of the 25% increase in India with regards to the Russian oil, the semiconductor 100% with exceptions being played through, the Swiss aspect of not being able to get past 39%, and now the gold tax that might be coming through as well. And then there's an EU piece about the pharma with getting past the 15% ceiling and sort of movements away from the EU sort of team.
So even those four alone, that's a lot of moving parts. We really don't have that much clarity on what's going to be happening in the next week or so. Yeah, exactly.
I think that the main takeaway in terms of where we are now, because of course, the tariffs that were being agreed and announced during July, went live yesterday, Washington time, just after midnight. And here we are today, and you listing the uncertainties that are still there. I think we can be sure that not just over the next couple of weeks, but ongoing, Trump is using tariffs in many different ways.
And ultimately, that level of uncertainty in terms of trade, I think is going to persist over the medium term and over probably the entire term of Trump's presidency. So I think that ultimately is definitely a negative, because obviously higher uncertainty is not good for businesses and households. And really, next week is important because we've got the CPI.
Last month, pulling out what we did in terms of import heavy categories, furnishings, apparel, recreational goods, combining the three month on month increases for those three categories, it was the biggest jump since January 2022. Now, services and rental inflation came down, so the overall headline was okay. But I think ultimately, that could be the first signs of tariff related goods inflation coming through.
And if that's more compelling next week, it puts the Fed in a very difficult spot. So really, I was looking at, for example, these tariffs that have just gone live. We got guidance from the trade representative department saying that goods that are seaborne ahead of that live date yesterday, as long as those goods reach the US by the 7th of October, they won't be hit with that tariff.
About 45% of all imported goods come via cargo ships. So that's a big, big chunk that might not be impacted until certainly a good chunk of October, which means that CPI data isn't released until November. So through the rest of this year, we're going to be looking at the CPI, looking for the tariff impact and the uncertainty in terms of whether or not it's coming through on inflation.
So it's such a significant lag, considering where we've come, you know, where we started to where we're potentially getting to October, November, before we actually see that, you know, that's a long period of time to be talking, looking, and trying to find these sort of indications. Yeah, yeah. And again, if the June data was evidence of it coming through, it's not going to suddenly stop.
I think we're going to continue to see evidence, whether it's compelling enough to pull the Fed back is one of the key questions. But, you know, ultimately, it leaves the Fed in a very difficult position. Okay, great.
Now, if we sort of jump a little bit across, well, I suppose it's not a little bit, but we're talking about interest rates and Bank of England just came out this week. How do we see that this sort of plays out for us in the sort of near future? Yeah, we've got a long euro sterling trade view in our publications at the moment.
It's been running for a while. And we're still in the money, but obviously, we lost some yesterday with the outperformance of the pound. You know, I was, yeah, I was surprised by the degree in which there was a shift away from what had become the focus.
When you look at the May and the June NPC meetings, the communications were very much towards the building evidence of weakening labour markets. They started to reference slack, opening up, being more confident about wages coming down. And that was kind of leading us to believe that if anything, the risks were building that we could be in a position where you get back-to-back rate cuts.
That's gone away after yesterday, of course. But the way they've pivoted, I can understand it to a degree. And Andrew Bailey yesterday said, we have to look at the consequentials of inflation rising to 4%, which is where they're predicting the peak in September.
Consequentials meaning does this filter through into inflation expectations like it did before? It's food and energy. It's goods that you can't really substitute away from.
And if it lifts expectations, does it feed into another potpourri in wage growth? I can kind of understand that. But the pivot to me is a reflection simply of the ongoing divisions within the NPC.
And the last time, we actually haven't had a unanimous NPC vote since this tightening cycle began. The last unanimous vote was when the policy rate was at 0.1% in 2021. So September 2021, I think, was the last unanimous vote.
So the NPC is divided. And clearly the vote yesterday, first time ever, we had to have two votes. It's still very divided.
And that pivot back towards inflation risks definitely reflects that. I don't think, I know the pound has rallied. I don't think yesterday is positive.
I can understand the short term positioning liquidation measure. Shorts were being built up. But ultimately, this is a kind of a, I use the word stagflationary in a cautious kind of way.
It was, of course, it's not really stagflationary. It's maybe stagflationary light because the projections for GDP have come down. Inflation certainly over the short term has gone up.
It's not a particularly attractive mix. And of course, the big elephant in the room that wasn't mentioned yesterday was the potential monumental tax increases that are coming because of the fiscal hole, which is very negative for GDP and should certainly open up the capacity for potentially more rate cuts. So that's in the market price, even though it wasn't really mentioned yesterday.
And I therefore think the scope for any kind of sustained bounce of the pound is pretty limited. Okay, great. Thank you, Derek there.
Last one was a quick one from a couple of my clients. They were looking at the Japanese PM movement over there. Is he in trouble?
Is Shiva in trouble? He's clearly trying to protect his position at the moment. But is that a realistic thing that we should be looking at?
Yeah, like I think, you know, dollar yen is up a bit today. It's definitely the end of underperforming. Pricky because I'm starting to become a little bit more bearish on the dollar again.
I think the factors are starting to fall into place that you could get another bite of dollar selling. But at the same time, the end doesn't look particularly attractive with this issue hanging over it. And it looks very likely, given the LDP gatherings this week, that according to one LDP diet member, between 60 and 70% of participants in a gathering this week were looking for Ishiba to resign and for somebody to take responsibility for the upper house elections.
It's going to go out to the prefectures as well. And a decision is likely to be made in a couple of weeks towards the end of August. To me, it's looking more likely than not that there will be a leadership election.
And obviously, if that is the case, probably Ishiba will step down. I couldn't imagine he'd run in a leadership election. So then, yeah, that opens up the whole issue around fiscal slippage, pressure on any kind of incoming prime minister to fiscally loosen the strings again to protect the household from the cost of living crisis.
And yeah, that potentially brings back JGB instability and all of that political risk You know, it doesn't look good for the yen over definitely maybe the next... So an uncertain autumn then? Yeah, through, well, if there's a leadership election, it'll probably be in the latter part of September.
So, you know, we got confirmation, as I said, maybe in a couple of weeks. My feeling is we'll have a leadership election. So yeah, you're talking, you know, potentially August, September, most of September, a period of uncertainty.
So certainly eyes on that area for the next couple of weeks, see how it plays out, because that will have effects going through into the next couple of months. Yeah, definitely. Whether you play that through long dollar yen, given what I've just said about turning a bit more bearish on the dollar, maybe not.
So maybe you look at the yen crosses and, you know, maybe Euro yen or possibly Aussie yen. We've got the RBA meeting next week. That's the one key central bank meeting fully priced that they'll cut.
But we've also got the China agreement that needs to be made by Tuesday in terms of a 90-day extension. If that does transpire, then, you know, that's potentially good for Aussie dollar as well. Okay, great.
Derek, if it's okay with you, I'll leave it there. Good stuff. Of course.
That's fantastic. Some really good points covered. So I really appreciate your help.
Great. Thanks. Thanks, James.
Have a good weekend. Cheers, you too. Thank you for listening to this MUFG Global Markets podcast.
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