Macro & Markets forecast edition

Macro & Markets forecast edition: Short-Term Outlook Positive for the USD Marketing communication

Samir Barki | Sara Midtgaard | Joel Lundh | Henrik Unell

USD strength holds near-term, with room to run before longer-term factors kick in.

Short-Term Outlook Positive for the USD The dollar has strengthened over the past month, particularly following Kevin Warsh's hawkish speech at the Jackson Hole Symposium, followed by a strong August labor market print and inflation numbers that remain on the high side. The mood has shifted since the July monetary policy meeting, when markets appeared skeptical of the Fed's willingness to respond decisively to inflation pressure. That skepticism is gone after this week's hawkish rate hike. With the Committee raising rates for the first time since 2023, the question is whether this is a one-o move or the start of a new hiking cycle. History suggests hikes rarely arrive alone: no hiking cycle this century has consisted of just one.

As outlined in Macro & Markets: Jackson Hawk or Jackson Blu?, Warsh chose the hawkish scenario, and the curve flattened while the dollar strengthened on impact. We think this move firmly confirmed the start of a rate hike cycle that will support the dollar in the near term against the euro, even though part of this is already priced in. We therefore revise down our year-end forecast for EUR/USD to 1.14 from 1.16, and expect EUR/USD to test 1.12 in H1 2027 before weakening to 1.17 in H2 2027 and 1.21 by end-2028.

Beyond the Fed, the broader macro backdrop still favors the dollar. The US remains the global growth center, and is now even more attractive given higher rates and its position as the place to be for AI stocks, both dollar-positive.

The main counterarguments are structural. First, US public debt is a concern likely to dominate fiscal (and monetary) policy once inflation subsides in 2027. Fiscal tightening isn't realistic less than two months before

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the midterms, with Trump already facing low approval ratings across several categories. Second, international portfolios are already heavily exposed to US assets, so the scope for further valuation-driven inflows may be narrowing. That could leave the dollar increasingly vulnerable should sentiment toward US assets deteriorate, or should foreign investors begin to reduce or hedge their exposure. As always, though, that requires a catalyst, and for now we see none: growth is holding up, earnings have not disappointed, and nothing in the data points to a broad-based reassessment of US assets.

Foreign flows into US securities are still going heavily into stocks and credit, suggesting growth- and AI- seeking demand remains the key near-term driver of dollar strength. Softer flows into USTs may hint at early fiscal credibility concerns, but we see this as a slower-moving H2 2027 risk rather than something currently osetting the broader pull toward US assets, especially since a 25bp hike, or even the cumulative 75bp our forecast assumes, is unlikely to derail the AI investment boom, in our view. Capex of this scale from hyperscalers was initially funded largely through free cash flow, though financing is increasingly shifting toward debt. Even so, a move of this magnitude is unlikely to meaningfully raise the cost of that debt relative to the return profile hyperscalers are underwriting.

The euro area, by contrast, remains exposed to geopolitical and trade risks. Europe is lagging in AI and other critical technologies, as well as in rare earth minerals. Progress on EUR-supportive initiatives, such as a common safe asset or deeper fiscal integration, remains limited, held back by the lack of consensus among member states on jointly issued debt. Political risks in Europe add a further headwind for the EUR, reinforcing the dollar side of the trade. We also expect one more ECB rate hike in December, followed by another in Q1 2027, with the Fed following a similar path: one more hike in December and another in Q1 2027. We do, however, see downside risks to the ECB call relative to current market pricing, particularly if…