With all that is happening with US-Iran developments and the big selloff in tech shares, let’s not forget that there is still the central bank bonanza this week. And on that note, none is bigger than the FOMC meeting that will come tomorrow.
The Fed policy decision in itself is expected to be rather straightforward. The central bank is widely expected to keep interet rates unchanged, but will there be a more hawkish twist to follow after?
Personally, I feel that the threshold for that is a bit high. That especially with the risks involved in changing their communique, not least with still some way to go before the next meeting in September. Who knows what will happen with US-Iran developments by then.
That being said, some analysts are expecting the call this month to be a lot closer than anticipated and that could spark some upside risks for the dollar moving forward.
ANZ notes that:
“OIS now reflect 45 bps of Fed hikes in 2026, with September fully priced for 25 bps. But if oil prices continue to rise, the view that peak Fed hawkishness is behind us will be tested, leaving the DXY vulnerable to a retest of the year-to-date high near 101.80. The last FOMC meeting showed a still-hawkish Fed. Half the committee projected a 2026 hike, with some pencilling in two. Our base case for the upcoming meeting is for a hawkish hold. We have a positive USD bias around the FOMC meeting, and in the event there is a surprise rate hike, this will likely see the DXY breach 102, with upside risk.”
At the same time, BofA is also expecting a tighter decision with even an off chance for a surprise move tomorrow:
“At the time of writing, the OIS curve is pricing 9 bps for the July FOMC (36% chance of a rate hike). While the recent inflation data was soft, the surge in energy prices is likely behind this recovery in July probability. We expect the Fed to stay on hold, but it seems prudent to price in a knife-edge decision. If inflation credibility is paramount, the best way to reinforce this would be to hike preemptively, rather than wait until September.”
As such, the firm sees a more positive outlook for the dollar even with two-sided risks still present:
“We stay constructive USD for Q3, but the tight call on the July FOMC – both the rate decision and Warsh’s press conference – suggests two-way risks near-term. While the USD strengthened last week, partly driven by higher US rates, the narrowing of US data surprises vs. the rest of the world may restrain upside for now, short EUR/USD via put spreads remains our preferred USD long expression.”
Adding to the call for EUR/USD short positioning is Danske as well:
“We expect the Fed to remain on hold in the July meeting, in line with consensus. Markets price in 20-25% probability for a hike. Without new projections or forward guidance from Warsh, the focus will be on the vote split. We think the most likely outcome is 2-4 votes in favour of a hike. Last week, we recommended a tactical short EUR/USD spot position ahead of the July decision. We see an asymmetric outcome space around the meeting, where a unanimous hold would not materially affect hike expectations in later meetings, but a surprise hike or a close-call split decision could drive a hawkish repricing of USD real rates and support broad USD FX.”
This article was written by Justin Low at investinglive.com.