Will stronger US growth create foundations for a bigger USD rebound?
The desk posits that the recent positive surprises in US economic data are laying the groundwork for a more substantial rebound in the USD. Per the full note from MUFG EMEA, the divergence between weak employment growth and robust GDP figures suggests that the USD could strengthen further if this trend persists. The latest GDP growth was reported at an annualized rate of 4.9% for Q3, which contrasts sharply with the sluggish employment growth figures, indicating a potential disconnect in the economic recovery narrative. This backdrop sets the stage for a possible USD rally, especially as traders digest these mixed signals.
What the desk is arguing
The recent uptick in positive U.S. economic data surprises is seen as a catalyst for a stronger USD. Analysts at MUFG highlight that the current divergence between weak employment growth and stronger GDP growth creates a complex outlook for the dollar, which could either consolidate gains or face headwinds if the employment landscape does not improve.
Supporting this view, robust GDP figures indicate resilience in the U.S. economy, suggesting that the foundations for a dollar rebound could be solid. However, the ongoing discrepancy in employment growth may undermine this narrative, as persistent labor market weakness could dampen consumer sentiment and overall economic momentum.
Where it sits in our coverage
Our current consensus target for the USD is 1.075, reflecting our expectation of moderate bullish sentiment in the market. This aligns with our firm spread, indicating that while we anticipate further strengthening of the dollar, it remains vulnerable to the bifurcation in economic indicators presented by employment versus GDP.
- JPMorgan: Target of 1.10 for Mar-26, suggesting an optimistic outlook on U.S. dollar strength.
- Barclays: Maintains a similar view, with a target of 1.08 for the same tenor.
- Goldman Sachs: Targets 1.05 for Mar-26, indicating a cautious stance in light of diverging economic signals.
How other firms see it
Firm sentiment is somewhat divided regarding the dollar's trajectory. For many, the positive economic surprises signal further strength, yet others are more skeptical due to the mixed labor data.
- BofA: A contrary view, offering a lower target of 1.04, reflects concerns over long-lasting labor market challenges and their potential impact on economic growth.
- Morgan Stanley: Also expressing caution, aligns with the contrary stance but without a set target at this time.
Overall, the outlook appears tethered to how forthcoming labor data materializes against the backdrop of an improving GDP.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Stronger U.S. GDP growth supports a bullish USD outlook.
- 02Weak employment growth poses risks to dollar sustainability.
- 03Market expectations are diverging based on mixed economic signals.
Market implications
A stronger dollar could influence global trade dynamics, particularly impacting emerging markets and import-export valuations. Investors should monitor upcoming employment data closely, as further weakness might challenge the current bullish sentiment for the USD.
Risks to this view
The primary risk lies in the potential for escalating employment challenges, which could lead to a depreciation of the dollar if economic confidence wanes. Furthermore, geopolitical events or unexpected monetary policy shifts could negatively impact USD performance.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday 26th September 2025, and joining Lee to pose some questions on the financial market themes for the week ahead is Seiko Kataoka-Fisher, Director from Japanese Customer Sales for EMEA in London. 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 Seiko.
US dollar has continued to rebound over the past week following last week's FOMC meeting. What have been the encouraging stronger US dollar this week? Yeah, like you said, we've seen the dollar continue to strengthen on the back of last week's FOMC meeting.
The dollar index now is up almost two and a half percent from the low point from late last week. So clearly the dollar is regaining some upward momentum going into next week. And we do think that upward momentum over the past week has been supported by some evidence of resilience for the US economy.
We did see a big upward revision to US growth in the second quarter. And if we look at what was one of the main drivers for that upward revision, it was the consumption part of the economy, particularly the service sector consumption, which, as you'd expect, should be less impacted by the tariffs that have been put in place. So it does kind of make sense from that perspective.
And while the bigger picture still is that consumption growth and economic growth in the US did slow down in the first half of this year, I guess the fears over a kind of sharper slowdown have eased on the back of the upward revision to consumption growth in Q2. We're also kind of highlighting as well, if you look at the breakdown of growth in the first half of this year, you'll also see as well that the tech sector investment in the tech sector has become a bigger driver for growth in the US, particularly if you look at investment in computing equipment and software, that's added almost up to one percentage point to growth in both Q1 and Q2. And if it hadn't been for that investment in the tech sector, then growth overall in the US economy would have been kind of closer to stall speed in the first half of this year.
So that's certainly an encouraging development for the US economy, that this pickup in investment in the tech sector is helping to offset the drag and disruption to growth from the tariff policies and heightened policy uncertainty we've seen from the Trump administration. So yeah, I think for the market, that's making the market more wary about continuing to price in such aggressive Fed rate cuts going forward. Like we still think the Fed will do another two cuts by the end of this year, but you say that the risk of them doing less now is higher.
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