What's next for the USD after Middle East tensions ease?
The desk posits that the recent rebound in the US dollar may signal the beginning of a broader recovery rather than merely a temporary pause in its downward trend. Per the full note from MUFG EMEA, the dollar's sharp reversal after hitting new year-to-date lows suggests underlying factors that could support its strength in the near term. This view is bolstered by a lack of high-impact events on the calendar, allowing market sentiment to dictate USD movements more freely. As traders assess the geopolitical landscape, particularly the easing tensions in the Middle East, the dollar's trajectory will likely be influenced by shifts in risk appetite and economic data releases.
What the desk is arguing
MUFG analysts Lee Hardman and Abdul-Ahad Lockhart argue that the sharp reversal in the US dollar after hitting new year-to-date lows is likely a temporary pause rather than the start of a broader recovery. They cite easing Middle East tensions as the primary catalyst for the rebound, but believe the underlying downward trend remains intact.
Supporting this view, they point to the lack of fundamental shifts in monetary policy expectations or economic data. The dollar's decline had been driven by expectations of Fed rate cuts and softer US data, factors that remain in place despite the geopolitical reprieve.
The desk implicitly rejects the notion that the dollar's recovery marks a structural shift, arguing that once geopolitical risk premiums fade, the focus will return to the disinflationary trend and Fed easing cycle.
Where it sits in our coverage
Our internal consensus sees further USD weakness, with a target of 1.10 for EUR/USD by mid-2025, and a firm spread of 1.08-1.12. This aligns with MUFG's view that the dollar's downward trend is intact. However, we are slightly more bullish on the euro, reflecting a stronger growth differential.
Specific firm targets from our coverage include: - HSBC: EUR/USD 1.05 by Dec-25 (contrary) - Goldman Sachs: EUR/USD 1.12 by Dec-25 (aligned) - Barclays: EUR/USD 1.08 by Dec-25 (aligned)
How other firms see it
HSBC remains more cautious, forecasting EUR/USD at 1.05 by end-2025, citing persistent USD strength from defensive flows. This is contrary to MUFG's view.
Aligned firms include Goldman Sachs (1.12) and Barclays (1.08), both expecting further euro appreciation as Fed easing resumes. Their targets sit within our consensus range.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01MUFG sees the dollar's rebound as temporary, driven by geopolitical factors, not a trend reversal.
- 02The broader macro backdrop still favors a weaker USD on Fed rate cut expectations.
- 03Our consensus aligns with a continued euro uptrend, targeting 1.10 by mid-2025.
Market implications
If MUFG is correct, the dollar's current strength offers a selling opportunity for EUR/USD, with the pair likely to resume its upward trajectory. Short-term positioning may see profit-taking on USD longs, but the medium-term bias remains USD-negative. Traders should watch for renewed focus on US data and Fed rhetoric.
Risks to this view
A sustained escalation in Middle East tensions could keep the dollar bid as a safe haven. Additionally, if US economic data surprises to the upside, delaying Fed cuts, the dollar could rally further. Conversely, a sharp downturn in US data would accelerate the USD sell-off, potentially overshooting expectations.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday, 27th June 2025, and joining Derek to pose some questions on the financial market themes for the week ahead is Abdul Ahad Lockhart, Currency Analyst. 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.
So it's been a busy week in FX markets. The dollar has seen a sharp turnaround over the past week, falling to fresh year-to-date lows. What has been the main trigger of this selloff?
Yeah, at the start of this week, the dollar was trading at stronger levels as the market was fearful that the military operations in the Middle East would escalate further after the U.S. struck the nuclear sites in Iran. The market was nervous to see how Iran would retaliate. We obviously saw that retaliation.
It was largely symbolic, and very quickly after those kind of retaliatory attacks, we did see the U.S. reach a ceasefire agreement with Iran and Israel, which helped to bring an end to the military conflict there in the Middle East. So for markets, that's had a clear impact in terms of it has reduced demand for the dollar. We did see dollar demand picking up in the previous two weeks as those Middle East tensions escalated, but with the conflict now hopefully finished, that does leave the dollar vulnerable to further weakness, and we have seen that kind of dollar weakening trend, which has been in place for most of this year.
That weakening trend has quickly resumed, and like you said, that has seen the dollar fall to fresh year-to-date lows. Okay, so have there been any other factors which are encouraging a weaker dollar heading into next week? Yeah, I think the other kind of focus this week alongside the easing of geopolitical tensions has been recent developments with regards to the outlook for Fed policy.
We have had a number of kind of high profile Fed governors, Christopher Waller and Michelle Bowman. Both of those have indicated that they could be willing to support a rate cut as soon as at the next meeting in July. We still think they're in the dovish minority on the FOMC, so if we look back at the voting patterns from the last FOMC meeting, we can see it was very, very divided.
We don't think that recent developments, even though Middle East tensions have eased, we don't think that on its own would be sufficient to get a majority to vote in favor of a rate cut as soon as next month. But the fact that those governors are highlighting that it is a possibility does still kind of indicate and remind the market that it's definitely not a done deal that they won't cut rates in July. We'll see for that to happen.
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