FX Daily: Hawkish Fedspeak Breaks Oil-USD Link

While oil prices declined and global equities rallied, the dollar had a strong start to the week. That’s primarily thanks to hawkish comments from Federal Reserve officials Austan Goolsbee and Alberto Musalem, which prevented US front-end rates from following the global correction. EUR/USD still faces mostly downside risks in the near term.

USD: Hawkish Fedspeak supports dollar

The dollar had a strong start to the week despite a decline in oil prices and strong risk sentiment. In our view, part of the move reflected a catch-up to levels seen before Friday’s reported Bank of Japan rate check, which had damaged USD momentum across the board.

Hawkish Fed commentary was however the clearest driver. Chicago Fed President Austan Goolsbee warned that supply shocks, combined with strong spending and AI-related investment, could keep inflation persistent. He added that the path back to 2% inflation may not be painless. Although he is a non-voter in 2026, Goolsbee sits near the centre of the FOMC spectrum and is therefore viewed as a useful gauge of FOMC consensus.

Later in the day, St. Louis Fed President Alberto Musalem reinforced the hawkish message, arguing that front-loaded gradual tightening is preferable and that policy remains accommodative. Musalem is seen as one of the more hawkish members and may be among the four officials who projected two additional hikes this year in the dot plot, although he is also a non-voter.

The comments supported front-end USD rates on a day when Brent briefly slipped below $100/bbl, pulling other G10 rate expectations lower. Fedspeak will continue to have the potential to break the oil-USD relationship during periods of falling energy prices, as the Fed is viewed as being more fundamentally focused on inflation while other developed central banks are seen as more sensitive to oil price dynamics. Today, we’ll hear from two dovish voices, John Williams and Philip Jefferson. Any hawkish comments from them could have a deeper impact. Tom Barkin (neutral, non-voter) will also deliver remarks.

Yesterday’s price action has reinforced our view that near-term risks for the dollar remain skewed to the upside. DXY may be headed to 101.0 already before the end of the month. The data calendar remains light in the US, with only weekly ADP jobs figures and the Richmond Fed manufacturing index worth mentioning today. The UN General Assembly has started in New York, with President Trump delivering an address and expected to hold talks with Gulf states today.

EUR: Falling fair value

EUR/USD short-term fair value based on our 60-day model has dropped below 1.150 for the first time since late July. Interestingly, oil prices are showing a small beta, with equities and rate differentials the dominant drivers. The spread between the two-year SOFR and ESTR has rewidened to 150bp, also to levels last seen in July.

European Central Bank officials have so far maintained a notably hawkish tone, keeping an October hike firmly on the table. Even so, investors appear increasingly willing to embrace the opposite narrative, pointing to further near-term downside pressure on EUR/USD.

Our baseline, still, is that hawkish expectations are too aggressive on both sides of the Atlantic. We expect just one additional hike from both the ECB and the Fed this year, followed by no further tightening in 2027. That view supports our 1.160 year-end EUR/USD forecast. In the near term, however, the risks favour a retest of the 1.1320-1.1330 lows reached in June.

Today’s focus is on a busy slate of ECB speakers, including ECB President Christine Lagarde. On the data side, the only notable release is the eurozone consumer confidence indicator for September. Meanwhile, the French 10-year spread over German bunds has hit the 100bp mark. The FX market is treating this with caution, but risks of further spread widening remain, and the EUR may start to pay greater attention soon.

GBP: Holding pattern

EUR/GBP has traded in a fairly tight range of 0.855-0.860 since the start of September. Last week’s Bank of England meeting was not as hawkish as the ECB or the Fed, but equally failed to really push back against aggressive market pricing for tightening.

Markets are attaching a large probability of a BoE rate hike in November (c.75%) and a huge 92bp by June. Our economists’ call is still for no rate increase, which results in a bearish GBP outlook as our baseline. Even if another oil price jump prompts a November move, it seems unlikely the BoE will match market expectations for further tightening, meaning some large dovish repricing should still occur at some point.

In the coming weeks, we’ll hear more about the content of the UK October budget. The pound isn’t embedding any fiscal risk premium for the moment. We still expect a move to 0.870 in EUR/GBP on the back of the central bank story.

HUF: Hawkish NBH signals should support the forint

The National Bank of Hungary is expected to pause its current “mini” easing cycle, leaving the policy rate at 5.50%. It will also publish a new forecast and may review its inflation target, potentially outlining a two-step reduction from 3.0% to 2.0%.

Hungary remains the key CEE story, with by far the largest long positioning across asset classes, driven by the idiosyncratic post-election narrative and prospects for euro adoption. However, the recent surge in global energy prices has again highlighted Hungarian assets’ high beta to global markets, reflecting both the economy’s exposure to energy costs and crowded positioning. Rate expectations have consequently repriced sharply higher over the past two months, reinforced by reports that the NBH may pause rate cuts to strengthen the case for lowering its inflation target.

The front end now prices less than one full cut, a view that may be tested today. At the same time, we would not be surprised if the market started to price a small chance of rate hikes in the event that energy prices start rising again, as elsewhere in CEE, despite our forecast for cuts later this year. By contrast, a lower inflation target should support the long end, pointing to further flattening even though the curve is already inverted. The forint should also benefit from a more hawkish NBH: both a pause and a lower inflation target would signal tighter policy for longer and enhance the carry appeal. Still, the domestic story is having limited market impact, and a sustained rally in FX and fixed income is unlikely without some progress in the geopolitical situation.