Bearish outlook
The U.S. dollar's strength in the aftermath of the Iran conflict has lost steam. While the USA remains a net energy exporter, the surge in oil prices has lifted inflation expectations and pressured central bankpolicy.
In the Euro area, surprisingly robust data have supported growth expectations despite elevated energy costs. Headline inflation remains high because of energy and food price pressures. This backdropsuggests the ECB may need to act preemptively with arate hike in September to forestall second-roundeffects.
In the US, the labor market showed mixed payrolls, butthe broader economy remains resilient. This supportedstrong second-quarter earnings. Core PCE inflation isstill at 3.3% year over year (y/y), well above the Fed's2% target, prompting markets to question the central bank's credibility in achieving that goal. We anticipate asingle Fed rate increase in December, after the November midterm elections. Indeed, policymakersbalance persistent price pressures with growth concerns.
Our outlook for the dollar remains bearish. Diminishedconfidence in the Fed's capacity to lower inflation,combined with worries over expanding fiscal deficits,weighs on the currency. Moreover, Chairman Warsh'sremarks at the Jackson Hole meeting were somewhathawkish, reaffirming the commitment to the 2 PCEtarget and a willingness to use the fed funds rate to getthere. This was probably an attempt to restore policycredibility, but it did not calm the US bond market. TheTreasury's buyback announcement further dampensinvestor enthusiasm for holding dollars, creating adisconnect between policy signals and marketpositioning.
Therefore, we change our 3-month EUR/USD targetto 1.16 and keep our 12-month target at 1.20 (valueof one euro).
No major trend
The UK headline CPI inflation accelerated to 2.9% y/y inJuly, up from 2.6%. Core inflation held steady at 2.6%y/y, while services inflation ran at 3.4% y/y. The dataindicates a smaller-than-expected rise in domesticenergy bills, offset by stronger price pressures on food.On the labor market side, conditions appear to bestabilizing rather than deteriorating. Theunemployment rate was unchanged at 4.9%, and totalpayroll employment slipped by 0.4%. The August flashcomposite PMI edged higher to 52, signaling continuedexpansion.
The Bank of England (BoE) kept its policy rateunchanged at 3.75% at the July meeting, signaling acautious stance and no urgency to tighten monetarypolicy. While headline inflation has risen, mostmembers of the Monetary Policy Committee prefer towait for clearer signals. The latest data have notprovided conclusive evidence of "second-round effectsstemming from the energy shock, and the Committee islikely to seek further confirmation. Going forward, themost important variables will be inflation expectationsand the evolution of pay pressures. We now expect theBoE to hike in December.
The bearish GBP sentiment has moderated recently onthe expectation that a government led by AndyBurnham is likely to maintain the fiscally prudentapproach of former Prime Minister Sir Keir Starmer. Weexpect this uncertainty regarding the fiscal outlook topersist ahead of the October budget, leaving the GBPlargely range-bound. Meanwhile, a lack of significantdivergence between the BoE and ECB means ratedifferentials are unlikely to be a major driver for thecurrency.
We maintain our 3-and 12-month EUR/GBP targetsat 0.87 (the value of one euro). This suggest nomajor trend for the GBP.
CHF remains a safe heaven currency
The CHF has depreciated against the euro, with theEUR/CHF (the value of one euro) trading close to 0.94on September 2nd.
Swiss inflation eased slightly to 0.4% y/y in July, withcore inflation remaining steady at 0.3% y/y. TheManufacturing PMI increased to 57 in August. Therenewed acceleration was driven by strongerperformances across several key components such asproduction and order books. At the same time, the KOFbusiness index came in higher at 106.
The SNB’s decision to keep policy on hold in June at 0%suggests that the monetary policy setting is appropriatefor managing the uncertain backdrop. The decision,coupled with recent data releases, ultimately reinforcesour conviction that the SNB will remain in a holdingpattern for the foreseeable future. The central bankbalances inflationary pressures from the energy priceshock and disinflationary pressures from CHF strength,before delivering rate hikes in H2 2027.
The relative resilience of the Swiss economy reflects adiverse energy mix, lower energy intensity of output,and household electricity prices that are set annually tolimit volatility. Meanwhile, we continue to see the CHFsupported by a positive current account surplus.
The SNB continues to stress a willingness to intervenein FX markets. While scope for FX intervention by theSNB remaining intact, the data does not indicatesizeable or sustained intervention recently.
Accordingly, our 3-and 12-month targets forEUR/CHF remain at 0.92 (per one EUR). That suggesta stable CHF going forward.
Look for a gradual recovery
The JPY has appreciated against the USD, trading around 158 (value of one USD) on September 2nd.
The CPI data for July showed that the impact of the Middle East crisis has now started to translate into inflation. On a y/y basis, core CPI rose to 1.8% from 1.6%. Meanwhile, the PMI survey for August showed that the economy is holding up well. The manufacturing PMI rose to 54.9 from 54.2. The global AI investment boom is clearly boosting Japan's factory sector. The services PMI also rose to 52.5 from 51.2, suggesting that domestic demand is also holding up.
As expected, the Bank of Japan (BoJ) kept the policy rate at 1% in July. However, the decision was not unanimous; as we anticipated, one board member proposed a hike to 1.25%. Furthermore, the Outlook Report emphasizes upside risks to inflation and is more hawkish in tone than we expected. We now expect the BoJ to raise its policy rate to 1.75% sooner than we previously did, with the next three 25bp hikes to come in September, December and March to keep underlying CPI inflation below 2%.
The US Treasury’s involvement in the recent JPY intervention is historically noteworthy, but it alone cannot reverse the USD/JPY trend. As our note explains, FX interventions provide only temporary support. With inflationary pressures building, we expect the BoJ to accelerate its tightening cycle, which should bolster the currency. Moreover, unhedged local currency investment in Japanese equities should support the yen. In the short term, fiscal uncertainty continues to weigh on the currency.
Accordingly, our 3-month USD/JPY target is 158 and our 12-month target is 155 (value of one USD). This suggest a small upside for the Yen.
Target Change
The Swedish Krona has depreciated against the euro,with EUR/SEK (the value of one euro) trading around11.16 on September 2nd.
Sweden’s GDP for Q2 2026 was revised up to 3.3% y/y,outpacing the Riksbank’s June forecast and reflecting abroad rebound driven by household spending,government consumption and private investment. ThePMI remains robust, signalling strong activity and risingprice pressures, while core CPIF inflation in July rose to0.6% y/y, above the central‑bank estimate. Althoughheadline inflation stays low partly due to temporaryfiscal measures underlying pressures are building, asshown by business surveys.
The Riksbank left its policy rate at 1.75% in August,keeping a tightening stance but with less urgency.While noting stronger growth and higher inflation, theBoard said the outlook remains ambiguous, citingtemporary price drivers, a weak labor market andmodest corporate pricing. Guidance stays datadependent, with the likelihood of a later yearunchanged; markets now price a November hike and a40 bps by year end.
In the near term, the SEK might be vulnerable as a low-yielding currency. The outlook for the SEK is cautiouslyoptimistic. Regional growth, supported by spillovereffects from Germany’s defense plan and IA spendingshould support the Swedish Krona. Moreover, potentialchance of a Riksbank hike could support the currency.
Therefore, we change our 3-month EUR/SEK targetto 11.00 and our 12-month target to 10.80 (value ofone EUR), indicating potential appreciation for theSEK.
Target Change
The Norwegian krone (NOK) has appreciated againstthe euro with EUR/NOK (the value of one euro)trading around 10.80 on September 2nd.
Norway’s GDP grew 0.7% y/y in Q2 2026, supported bya strong rebound in business and public sectorinvestment, while household consumption stayedweak. Core inflation fell for a second month, with Julyat 2.7% y/y well under the Norges Bank’s 3.3% targetand headline CPI rose to 3.0% y/y, mainly due tohigher electricity prices.
In August Norges Bank left its policy rate at 4.25% andsoftened its forward guidance, pulling back from afirm near term hike. While it retains a tightening biasciting inflation that remains “too high” and recentdownside surprises, markets still price a Septemberincrease, though a December move now appearsmore likely. Nevertheless, the upside for inflation andwages keep the risk of an earlier hike alive.
Our bullish stance on the NOK remains intact. Whileoil prices remain volatile, the Norwegian kronecontinues to benefit from strong terms‑of‑trade, itshigh‑yield status, and resilient domestic growth.Persistent inflation suggests that Norges Bank is likelyto keep rates high or even raise them, furthersupporting the currency. Consequently, we expect theNOK to appreciate this year, aided by solid globalgrowth and its attractiveness as a high‑yieldingcurrency.
Therefore, Our 3-month EUR/NOK target is 10.80and we change our 12-month target to 10.60(value of one EUR). This suggest a gradualappreciation over the coming months
Uncertainty remains high
The Canadian dollar (CAD) has traded around 1.38 against the USD on September 2nd.
Canada’s economy rebounded sharply in second quarter, with GDP climbing 0.8% q/q after a weak first quarter. Domestic final sales were supported by strong consumer spending and a pronounced rise in business investment. The unemployment rate fell to a two year low of 6.4 %, signalling a tighter labor market. Headline CPI rose on higher oil prices, and the exclusionary core CPI also increased, but overall inflation expectations stay well anchored at 2.3% y/y.
The Bank of Canada (BoC) left its policy rate unchanged at 2.25 % in September but adopted a more hawkish stance. It warned of upside inflation risks stemming from persistently high energy prices and the ongoing Middle‑East conflict. While markets continue to price a year‑end rate hike, it as unlikely given heightened uncertainty and the dilemma between rising inflation and weaker growth.
We maintain a constructive but cautious outlook on the CAD. Diverging Fed versus BoC policies could pressure the Canadian currency. The USMCA’s shift to an annual review adds short term uncertainty. Any fresh negotiation news is likely to curb sentiment and pressure the currency. Broader USD weakness will continue to drive USD/CAD.
Given these factors, we maintain our 3-month USD/CAD target at 1.38 and our 12-month target at 1.35 (value of one USD). This suggest only a small upside for the CAD.
Target change
The Chinese yuan (CNY) has appreciated against thedollar and traded around 6.72 on September 2nd.
China’s headline CPI slipped 0.1% m/m while core CPIrose 0.3% m/m. The headline PPI declined 0.7% m/mfor a second straight month, with July’s y/y growtheasing to 3.5% from 4.1% in June. China’s officialmanufacturing PMI rose to 49.8 in August from 49.2 inJuly, a modest rebound driven by faster industrialproduction and increased fiscal spending.
The People’s Bank of China (PBoC) left the 1Y and 5YLoan Prime Rate (LPR) unchanged in August at 3.0%and 3.5%, respectively, maintaining levels seen sincethe last adjustment in May 2025. Our base caseremains the PBoC will stay on hold for the rest of theyear, due to pressure on banks' net interest margins(1.41% in Q2) and the diminishing marginal impact offurther rate cuts. Accordingly, we expect the 1Y and 5YLPR to remain unchanged in the near term.
The CNY has demonstrated notable strength in 2026,with the USD/CNY spot rate briefly falling below 6.71.The PBoC has been lowering the USD/CNY fixing,signalling a desire to keep the yuan stable against thedollar while allowing a modest gradual appreciation.Moreover, growing foreign demand forRMB‑denominated assets and wider international useadd upward pressure.
We change our 3-month USD/CNY target to 6.7and our 12-month target to 6.6 (value of one USD).This suggest a gradual appreciation over thecoming months.
Limited upside
The Australian dollar (AUD) has appreciated againstthe USD, trading around 0.72 on September 2nd.
Australia’s second quarter real GDP grew just0.4% q/q, indicating a slowdown. Householdconsumption is moderating as unemployment risesand real income growth eases, although a decliningsavings rate is partially cushioning spending. Publicdemand and net trade provide modest support. JulyCPI data were firmer than expected, with headlineinflation rising 1.0% m/m. The annual rate eased to3.5%, but price pressures remain elevated.
The Reserve Bank of Australia (RBA) unanimouslykept its policy rate at 4.35%, in August. While itreiterated that inflation is still too high, the statementcontained dovish undertones, and August minutesshowed a balanced debate between upside inflationrisks and downside labor and housing marketpressures. This consensus reinforces our view of ahawkish, prolonged hold.
The AUD remains supported by a favorable ratedifferential, strong equity markets and ongoingcommodity demand. However, the RBA’s dovish shiftand slowing growth have tempered earlier AUDstrength, and the currency is expected to remainrange-bound.
Therefore, our 3-month AUD/USD target is 0.73and our 12-month target is 0.71 (value of oneAUD).
Close to target
The New Zealand dollar (NZD) is trading around 0.59on September 2nd.
New Zealand’s economy rebounded, with firstquarter 2026 GDP revised to a 2 % annualized pace.Business surveys and PMIs recovered after theoil‑supply shock, signalling broad‑basedimprovement in sentiment and activity. Inflationstayed above the RBNZ target, with Q2 data showingupside surprises and persistent price pressures.
The Reserve Bank of New Zealand (RBNZ) raised itscash rate by 25 bps to 2.75 % in September, its secondconsecutive hike to curb inflation as energy‑pricepressures re‑emerge. The move was broadlyexpected, and the RBNZ now signals that a further 25bps increase could occur before year‑end. Marketcontinues to price 50 bp of hikes by the end of 2026and a cumulative 100 bp in 2027.
Our view has been cautiously optimistic, as it appearsthat the worst is probably behind us regarding theeconomic slowdown, but New Zealand’s largecurrent‑account deficit leaves the NZD vulnerable. TheRBNZ’s gradual policy tightening, alongsideimproving business surveys and activity data, isexpected to support the currency.
Our NZD/USD 3- and 12-month targets are 0.60(value of one NZD). This suggests no majorupside.
Target Change
The South African Rand (ZAR) has appreciated againstthe US dollar over the past month, trading around 16.05on September 2nd.
South Africa’s GDP likely slipped 0.2 % q/q (SAAR) in thesecond quarter 2026 after a 2.2 % rise in the first, asweaker mining and manufacturing output and subduedservices due to a squeeze on consumer purchasingpower. Headline inflation eased to 4.3 % y/y in July, downfrom 5.0 %, driven by low food‑price growth and lowerpublic‑transport costs; core inflation edged up to4.2 % y/y. Manufacturing PMI (50) and other businessindicators hint at tentative improvement for Q3, thoughnew sales orders and outlooks stay soft.
The South African Reserve Bank (SARB) left its policy rateat 7%, contrary to market expectations of a 25 bp hikeand a 25 % chance of a 50 bp increase. It warned ofweaker sequential GDP growth in Q2 and Q3 this yearand a sharp decline in both business and consumerconfidence, indicating caution about overtightening in asluggish economy. While still focused on inflationcontrol, the unchanged rate does not mark the end ofthe tightening cycle; a final 25 bp hike to 7.25 % is nowexpected by the end of the third quarter.
The continued diversification away from the USD byglobal investors should benefit the ZAR, as South Africa’snet international investment position is one of thelargest in CEEMEA. Moreover, emerging‑marketinvestors remain attracted to the rand because of itshigh real yields.
We remain positive about South Africa’s domesticoutlook. We adjust our 3-month target to 16 and our12-month target to 15.75 (value of one USD). Thissuggests some upside.
No major trend
The Indian rupee (INR) has remained flat against the USdollar over the past month, trading around 95 onSeptember 2nd.
India’s second quarter GDP expanded 7.8 % y/y, beatingconsensus, fueled by a cyclical recovery, strong exportsand strong public capex. Headline CPI held at 4.4 % y/yin July, unchanged from June, while core inflationremained low at 0.3 % m/m. Manufacturing PMI (52) isrobust and July industrial output rose 6.7 % y/y, drivenby capital goods and consumer durables.
The Reserve Bank of India (RBI) kept its policy rate at5.25 % in August, signalling a more dovish stance andtrimming inflation forecasts. Although the latest RBIminutes were unexpectedly hawkish, raising the oddsof an October hike, the baseline view remains aprolonged hold as the bank monitors core‑inflationmomentum and external risks. Market pricing stillimplies future hikes, but the RBI’s patient position issupported by contained inflation and solid growth.
The Indian rupee has stabilized, supported by strongcapital inflows, solid macro data and RBI initiatives toattract foreign‑currency deposits and externalborrowing. Nonetheless, it stays vulnerable to oil‑priceswings, global risk sentiment and seasonal importpressures. The INR continued to be seen as a strongcandidate among Asian high‑yield currencies. However,a sustained rally will likely depend on further declines inenergy prices and continued capital inflows.
Consequently, we see no trigger for a majorrebound over the coming months. our 3- and 12-month USD/INR targets are 95 (value of one USD).
Target Change
The Mexican peso (MXN) has appreciated against the USdollar over the past month, trading around 17 onSeptember 2nd.
The Bank of Mexico (Banxico) maintained its benchmarkrate at 6.50% in August for a second consecutive meeting.Banxico’s August minutes indicated a Board comfortablewith its current stance and in no hurry to define its nextsteps. We maintain our call for the reference rate to stayat 6.50% through the remainder of 2026 and for increasesto begin in February 2027,taking it towards 7.25% by end-2027.
Mexico’s GDP grew 1.4 % q/q (2.1 % y/y) in the secondquarter, a rebound driven mainly by temporary,sector‑specific factors rather than broad‑based strength.Annual headline inflation rose to 3.26 % from 3.14 % inJuly, while core inflation stayed near 3.9 % y/y, onlymodestly lower than June’s 4.03 %. July PMIs and businesssurveys were mixed, with both manufacturing and servicesindices below 50 and capex intentions near lows.Nonetheless, May’s fixed‑investment and consumptionfigures exceeded expectations, signalling demandstronger than sentiment surveys suggested.
External tailwinds stay strong as Mexico gains a largershare of U.S. imports and continues to attract foreigndirect investment. The MXN should remain well supportedby market demand for high yields solid fundamentals, andexpectations of rate hikes.
Considering these factors, we revise our 3-monthUSD/MXN target to 17 and our 12-month target to16.80 (value of one USD). This suggest a smallappreciation over the coming months.
Target Change
The Brazilian real (BRL) has appreciated against the USdollar over the past month, with USD/BRL tradingaround 5.13 on September 2nd.
The Central Bank of Brazil (BCB) cut interest rates againby 25bp at its August meeting, as expected, bringinginterest rates to 14%. The minutes brought a dovishtone regarding the deceleration of the economicactivity, but a hawkish one by increasing its level ofconcern on a looming inflationary threat and fiscalinstability. We expect the market to keep a 50%probability of an additional 25bp cut in September.The market will adjust this probability based onupcoming data, particularly on the inflation side. Therest of the curve will remain a function of the externalscenario and the outlook for the presidential election.
Brazil’s next major election is in October, and marketsare focused on the candidates’ fiscal‑consolidationplans, as debt sustainability remains the country’sprimary weakness. Polls suggest a tight race, withincumbent President Luiz Inácio Lula da Silva holding aslight lead.
We expect the BRL to remain an out‑performer in EMover the next months, as it will continue to benefitfrom its attractive carry.
Considering these factors, we adjust our 3-monthUSD/BRL target to 5.20 and keep our 12-monthtarget at 5.00 (value of one USD). This suggests amoderate upside for the BRL.
