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 bank policy.
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 a rate hike in September to forestall second-round effects.
In the US, the labor market showed mixed payrolls, butthe broader economy remains resilient. This supported strong second-quarter earnings. Core PCE inflation is still at 3.3% year over year (y/y), well above the Fed's 2% target, prompting markets to question the central bank's credibility in achieving that goal. We anticipate a single Fed rate increase in December, after the November midterm elections. Indeed, policy makers balance persistent price pressures with growth concerns.
Our outlook for the dollar remains bearish. Diminished confidence in the Fed's capacity to lower inflation, combined with worries over expanding fiscal deficits, weighs on the currency. Moreover, Chairman Warsh's remarks at the Jackson Hole meeting were somewhat hawkish, reaffirming the commitment to the 2 PCE target and a willingness to use the fed funds rate to getthere. This was probably an attempt to restore policy credibility, but it did not calm the US bond market. The Treasury's buyback announcement further dampens investor enthusiasm for holding dollars, creating a disconnect between policy signals and market positioning.
Therefore, we change our 3-month EUR/USD target to 1.16 and keep our 12-month target at 1.20 (value of 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 domestic energy bills, offset by stronger price pressures on food.On the labor market side, conditions appear to bestabilizing rather than deteriorating. The unemployment rate was unchanged at 4.9%, and totalpayroll employment slipped by 0.4%. The August flash composite PMI edged higher to 52, signaling continued expansion.
The Bank of England (BoE) kept its policy rateunchanged at 3.75% at the July meeting, signaling acautious stance and no urgency to tighten monetary policy. While headline inflation has risen, mostmembers of the Monetary Policy Committee prefer to wait for clearer signals. The latest data have not provided conclusive evidence of "second-round effects stemming from the energy shock, and the Committee islikely to seek further confirmation. Going forward, the most important variables will be inflation expectations and the evolution of pay pressures. We now expect the BoE 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 prudent approach of former Prime Minister Sir Keir Starmer. We expect this uncertainty regarding the fiscal outlook topersist ahead of the October budget, leaving the GBP largely range-bound. Meanwhile, a lack of significant divergence between the BoE and ECB means rate differentials are unlikely to be a major driver for the currency.
We maintain our 3-and 12-month EUR/GBP targets at 0.87 (the value of one euro). This suggest no major trend for the GBP.
CHF remains a safe heaven currency
The CHF has depreciated against the euro, with the EUR/CHF (the value of one euro) trading close to 0.94 on September 2nd.
Swiss inflation eased slightly to 0.4% y/y in July, with core inflation remaining steady at 0.3% y/y. The Manufacturing PMI increased to 57 in August. The renewed acceleration was driven by stronger performances across several key components such as production and order books. At the same time, the KOF business 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 appropriate for managing the uncertain backdrop. The decision, coupled with recent data releases, ultimately reinforces our conviction that the SNB will remain in a holding pattern for the foreseeable future. The central bank balances inflationary pressures from the energy price shock 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 to limit volatility. Meanwhile, we continue to see the CHF supported by a positive current account surplus.
The SNB continues to stress a willingness to intervene in FX markets. While scope for FX intervention by the SNB remaining intact, the data does not indicate sizeable or sustained intervention recently.
Accordingly, our 3-and 12-month targets for EUR/CHF remain at 0.92 (per one EUR). That suggest a 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 around 11.16 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. The PMI remains robust, signalling strong activity and risingprice pressures, while core CPIF inflation in July rose to 0.6% y/y, above the central‑bank estimate. Although headline inflation stays low partly due to temporary fiscal 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, the Board said the outlook remains ambiguous, citing temporary price drivers, a weak labor market andmodest corporate pricing. Guidance stays data dependent, 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 cautiously optimistic. Regional growth, supported by spillove reffects from Germany’s defense plan and IA spending should support the Swedish Krona. Moreover, potential chance of a Riksbank hike could support the currency.
Therefore, we change our 3-month EUR/SEK target to 11.00 and our 12-month target to 10.80 (value of one 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 by a strong rebound in business and public sector investment, 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% and softened its forward guidance, pulling back from afirm near term hike. While it retains a tightening biasciting inflation that remains “too high” and recent downside surprises, markets still price a September increase, though a December move now appears more likely. Nevertheless, the upside for inflation and wages keep the risk of an earlier hike alive.
Our bullish stance on the NOK remains intact. Whileoil prices remain volatile, the Norwegian krone continues to benefit from strong terms‑of‑trade, its high‑yield status, and resilient domestic growth.Persistent inflation suggests that Norges Bank is likely to keep rates high or even raise them, further supporting the currency. Consequently, we expect the NOK 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/m for a second straight month, with July’s y/y growth easing to 3.5% from 4.1% in June. China’s official manufacturing PMI rose to 49.8 in August from 49.2 in July, 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 against the 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. July CPI data were firmer than expected, with headlineinflation rising 1.0% m/m. The annual rate eased to 3.5%, but price pressures remain elevated.
The Reserve Bank of Australia (RBA) unanimouslykept its policy rate at 4.35%, in August. While it reiterated that inflation is still too high, the statement contained dovish undertones, and August minutes showed a balanced debate between upside inflation risks and downside labor and housing market pressures. This consensus reinforces our view of a hawkish, prolonged hold.
The AUD remains supported by a favorable rate differential, strong equity markets and ongoing commodity demand. However, the RBA’s dovish shiftand slowing growth have tempered earlier AUD strength, and the currency is expected to remain range-bound.
Therefore, our 3-month AUD/USD target is 0.73 and our 12-month target is 0.71 (value of one AUD).
Close to target
The New Zealand dollar (NZD) is trading around 0.59 on September 2nd.
New Zealand’s economy rebounded, with first quarter 2026 GDP revised to a 2 % annualized pace. Business surveys and PMIs recovered after the oil‑supply shock, signalling broad‑based improvement in sentiment and activity. Inflation stayed above the RBNZ target, with Q2 data showing upside surprises and persistent price pressures.
The Reserve Bank of New Zealand (RBNZ) raised its cash rate by 25 bps to 2.75 % in September, its second consecutive hike to curb inflation as energy‑price pressures re‑emerge. The move was broadly expected, and the RBNZ now signals that a further 25bps increase could occur before year‑end. Market continues to price 50 bp of hikes by the end of 2026 and a cumulative 100 bp in 2027.
Our view has been cautiously optimistic, as it appears that the worst is probably behind us regarding theeconomic slowdown, but New Zealand’s large current‑account deficit leaves the NZD vulnerable. The RBNZ’s gradual policy tightening, alongside improving business surveys and activity data, is expected to support the currency.
Our NZD/USD 3- and 12-month targets are 0.60 (value of one NZD). This suggests no major upside.
Target Change
The South African Rand (ZAR) has appreciated against the US dollar over the past month, trading around 16.05 on September 2nd.
South Africa’s GDP likely slipped 0.2 % q/q (SAAR) in the second quarter 2026 after a 2.2 % rise in the first, as weaker mining and manufacturing output and subduedservices due to a squeeze on consumer purchasing power. 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 to 4.2 % y/y. Manufacturing PMI (50) and other business indicators 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 hike and a 25 % chance of a 50 bp increase. It warned of weaker sequential GDP growth in Q2 and Q3 this year and a sharp decline in both business and consumer confidence, indicating caution about overtightening in asluggish economy. While still focused on inflation control, the unchanged rate does not mark the end of the tightening cycle; a final 25 bp hike to 7.25 % is now expected by the end of the third quarter.
The continued diversification away from the USD by global investors should benefit the ZAR, as South Africa’s net 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 domestic outlook. We adjust our 3-month target to 16 and our 12-month target to 15.75 (value of one USD). This suggests some upside.
No major trend
The Indian rupee (INR) has remained flat against the US dollar over the past month, trading around 95 on September 2nd.
India’s second quarter GDP expanded 7.8 % y/y, beating consensus, fueled by a cyclical recovery, strong exportsand strong public capex. Headline CPI held at 4.4 % y/yin July, unchanged from June, while core inflation remained low at 0.3 % m/m. Manufacturing PMI (52) is robust and July industrial output rose 6.7 % y/y, driven by capital goods and consumer durables.
The Reserve Bank of India (RBI) kept its policy rate at 5.25 % in August, signalling a more dovish stance and trimming inflation forecasts. Although the latest RBI minutes were unexpectedly hawkish, raising the odds of an October hike, the baseline view remains aprolonged hold as the bank monitors core‑inflation momentum and external risks. Market pricing still implies future hikes, but the RBI’s patient position issupported by contained inflation and solid growth.
The Indian rupee has stabilized, supported by strong capital inflows, solid macro data and RBI initiatives to attract foreign‑currency deposits and external borrowing. Nonetheless, it stays vulnerable to oil‑prices wings, global risk sentiment and seasonal import pressures. The INR continued to be seen as a strong candidate 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 major rebound 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 on September 2nd.
The Bank of Mexico (Banxico) maintained its benchmark rate at 6.50% in August for a second consecutive meeting. Banxico’s August minutes indicated a Board comfortable with its current stance and in no hurry to define its next steps. We maintain our call for the reference rate to stay at 6.50% through the remainder of 2026 and for increases to 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 second quarter, 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, only modestly lower than June’s 4.03 %. July PMIs and business surveys were mixed, with both manufacturing and services indices below 50 and capex intentions near lows. Nonetheless, May’s fixed‑investment and consumption figures exceeded expectations, signalling demand stronger than sentiment surveys suggested.
External tailwinds stay strong as Mexico gains a largershare of U.S. imports and continues to attract foreign direct investment. The MXN should remain well supported by market demand for high yields solid fundamentals, and expectations 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 small appreciation over the coming months.
Target Change
The Brazilian real (BRL) has appreciated against the US dollar over the past month, with USD/BRL trading around 5.13 on September 2nd.
The Central Bank of Brazil (BCB) cut interest rates again by 25bp at its August meeting, as expected, bringing interest rates to 14%. The minutes brought a dovishtone regarding the deceleration of the economic activity, but a hawkish one by increasing its level of concern on a looming inflationary threat and fiscal instability. We expect the market to keep a 50% probability of an additional 25bp cut in September. The market will adjust this probability based on upcoming data, particularly on the inflation side. Therest of the curve will remain a function of the external scenario and the outlook for the presidential election.
Brazil’s next major election is in October, and markets are focused on the candidates’ fiscal‑consolidation plans, as debt sustainability remains the country’sprimary weakness. Polls suggest a tight race, with incumbent President Luiz Inácio Lula da Silva holding as light lead.
We expect the BRL to remain an out‑performer in EM over the next months, as it will continue to benefit from its attractive carry.
Considering these factors, we adjust our 3-monthUSD/BRL target to 5.20 and keep our 12-month target at 5.00 (value of one USD). This suggests amoderate upside for the BRL.
