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FX BANK FORECAST · COVERAGE
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Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 36 institutional desks. No promotion.
FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 36 institutional desks. No promotion.
The recent sell-off in the USD is attributed to a combination of factors, including waning confidence in US and Japanese debt markets, as highlighted by MUFG EMEA analysts Lee Hardman and Abdul-Ahad. This sentiment shift has raised concerns about potential spillover effects into the FX market, particularly as investors reassess risk appetites amid rising yields and inflationary pressures. Per the full note source, the USD's decline is reflective of broader market anxieties, which could have implications for currency valuations in the near term.
The latest downturn in the USD is largely driven by rekindled fears surrounding the stability of US and Japanese debt markets. This decline in market confidence may lead to heightened volatility in FX trading as investors reassess their risk appetite and scrutiny of legacy safe havens.
Analysts note that persistent pressure on US Treasuries could stimulate a broader flight away from the dollar. Additionally, as investors digest these concerns, the stability of traditional currencies is being called into question, prompting a possible reallocation of capital towards alternatives that are perceived to carry less risk.
Currently, our consensus target for the USD is set at 1.075, reflecting an anticipation of moderate strength against a basket of currencies despite current headwinds. This view aligns with MUFG's analysis, which suggests that temporary market dynamics are influencing the currency's trajectory, although broader economic fundamentals remain critical in our assessments.
Notable projections include:
The analysis from MUFG aligns with sentiments from JPMorgan, which is forecasting a higher target amid these uncertainties. However, BofA holds a contrary view, predicting a lower target of 1.04 due to anticipated global economic challenges adversely impacting the USD's value.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
Market implications
If confidence in US debt continues to wane, we could see a sustained weakness in the USD, potentially leading to further pricing adjustments in FX contracts and increased hedging activity among institutions. This scenario could create opportunities for currencies perceived as more stable.
Risks to this view
The main risks include unexpected policy shifts by the Federal Reserve or geopolitical tensions that may further disrupt market confidence. Additionally, any significant shifts in economic data from the US could rapidly change current projections.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday 9th May 2025, and joining Lee to pose some questions on the financial market themes for the week ahead is Abdul Ahad Lockhart, Currency Analyst at MUFG. 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 Lee. Hi Abdul Ahad.
Well, great to have you back after your business trip to the US, I'm sure you've got some interesting insights for us. Let's kick off then in that case. So we've seen some renewed dollar selling over the past week, what have been the main drivers?
Yeah, like you say, the dollar in the previous kind of four week period has been trying to stage a kind of tentative recovery, but this week that's certainly lost momentum. I mean, I think there are a couple of kind of reasons why the dollar has come under some renewed selling pressure. Firstly, I think there's more focus again on the deteriorating fiscal outlook in the US.
I think over a week ago now we did see the downgrade to the US credit rating by Moody's, the final rating agency to strip the US of its AAA credit rating. While I don't think that in itself is kind of triggering any kind of force selling of US treasuries, it is just another indication of the loss of confidence in US debt markets. As we've seen this week, the Trump administration is still trying to pass through their budget for the current fiscal year, and it did pass successfully through the House over the last 24 hours.
And I think for investors, they're now scrutinizing the details of that bill in more detail. And our kind of main takeaway is that it does point towards a kind of continuation of this loose fiscal policy that's been in place. We've seen budget deficits in the US of what, 6% to 7% of GDP, which is very unusual outside of recessions or other kind of emergency type situations.
So that in itself is very concerning, and it certainly raises the question of if there doesn't appear to be any sort of desire from either the Republicans or the Democrats to really significantly bring those deficits down. And the current budget bill, which is going to pass through Congress, doesn't appear to be sufficient really to just significantly alter that debt trajectory going forward. So yeah, from that perspective, we do think that is becoming a bigger kind of headwind for the dollar and is raising more doubts over policymaking in the US, which has led to this recent loss of confidence in the dollar.
The second reason as well that we've seen the dollar weaken further this week is on the back of kind of building speculation, particularly in Asia, that the Trump administration is trying to kind of force other countries to allow their currencies to strengthen more against the dollar. The Asian countries have certainly been intervening to keep their currencies weak against the dollar for some time now, and it does appear that there is potentially some kind of truth behind recent stories that the Trump administration could be putting pressure on those countries in Asia in particular to have a more kind of hands-off approach and intervene less going forward in kind of exchange for the Trump administration potentially lowering tariffs on those countries. So yeah, certainly if we were to see a significant kind of regime shift in terms of Asian countries being kind of less interventionist going forward in the FX market, allowing their currencies to be more flexible and to strengthen more against the dollar going forward, that could lead to some further kind of broad-based dollar weakness as well.
One of the areas, like I mentioned before, is this renewed focus for markets on the US debt situation, and Abdullah, I know you've done some work over the past week looking at what happens if whether we see that kind of spillover into the FX market, what were your kind of main takeaways? Yeah, that's right. I mean, this month has seen notable weakness, weak results coming from both the US Treasuries and Japanese government bond auctions, underscoring growing investor unease and sovereign debt on sustainability.
The US Treasury 20-year bond auction drew tepid demand with bond clearing at high yield of 5.047%. However, the bid-to-cover ratio fell to 2.46, the lowest since February, highlighting limited investor appetite despite elevated yields. So in Japan, the 20-year JGB auction recorded its weakest demand since 2012 with an average bid-to-cover ratio of just 2.5.
This marks a significant deterioration in investor confidence in long-dated Japanese debt. So the poor auction outcomes in both markets have triggered a sell-off in sovereign bonds, particularly at the long end of the curve with duration risk, where duration risk is most pronounced. So this week, our analysis focused on the spillover effects of sharp repricing in long-dated sovereign debt markets on domestic currency performance.
And using our 12-month rolling Z-score framework, we monitored DXY and dollar-yen responses to similar long-end rate shocks. Our analysis, however, showed no significant directional bias over the one to two, one to three-month horizons. However, this episode may prove to be different.
The recent surge in the U.S. 30-year treasury yield driven by the weak auction demand has coincided with dollar softness, suggesting markets are maybe interpreting the move as a signal of deteriorating U.S. fiscal credibility. So going back to effects, after briefly rising above the 08700 level in April after Trump's Liberation Day tariffs announcements, euro pound has since reversed most of the move higher. Do you think euro pound can keep moving lower?
It's a good question. Like we saw pickup in volatility recently in euro sterling, which is usually a negative development for the pound when we see more financial market volatility like we did after Trump's Liberation Day tariffs announcements. That's usually a negative development for the pound, given the pound is one of the higher yielding G10 currencies.
That pickup in volatility makes long kind of pound carry positions less attractive. So we did see probably a clear out of some of those long pound positions against the euro, which had been built up over the last kind of year to two years. However, like I said, over the last month or so, the initial kind of tariff shock has been fading.
We have had some good news on the tariff front with Trump reducing tariffs on China, agreeing trade agreement slash deal with the UK. That's helped to bring down market volatility, and that's helped the pound to strengthen and to rebound against the euro. Obviously on that side of things, it's still very uncertain in terms of the tariff developments.
As we saw today, President Trump announced that he's threatening to put in place a new 50% tariff on imports from the EU, which could become effective from the 1st of June. So that's obviously a new kind of negative trade development, which could trigger a pickup in market volatility in the short term, which could lift euro sterling. However, like you say, from a fundamental point of view, to see if that higher 50% tariff was to be implemented against the EU, that would obviously be a bigger negative development for the euro than it would be for the pound.
It could widen expectations for policy divergence between the Bank of England and the ECB going forward. It certainly would increase the likelihood that the ECB would have to cut rates more than two times over the next six to 12 months. If we look at the recent data flow from the UK, we have had further evidence pointing towards the UK economy growing more strongly at the start of this year.
And this week as well, inflation, both headline and core inflation, proved firmer than expected in the latest months. So I think for the Bank of England, they're not in a rush to speed up the pace of rate cuts at this point in time. We think there's potential there for yield spreads to widen more in the pound's favor.
And if, like you say, carry conditions remain more supportive in the near term, that could help to bring euro sterling lower going forward as well. So that brings us to the end of the podcast. Thanks Lee for your insights.
And to our listeners, enjoy the rest of your weekend. Thank you for listening to this MUFG Global Markets Podcast. Rate, review and subscribe, and contact your MUFG sales rep for more information.
Come back next week for more insights from the Global Markets Research Team.
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