Dollar firm as policy risks build ahead of the Fed
Market overview
Oil prices have fallen sharply as easing tensions between the US and Iran remove much of last week’s geopolitical premium. Brent has moved well below July’s highs near $100, offering some relief to markets, although energy remains an important inflation risk should supply conditions deteriorate.
Attention is now shifting towards central bank policy, real yields and a critical week for US technology earnings. Apple, Microsoft, Amazon and Meta, which represent roughly 18% of the S&P 500, report between Wednesday and Thursday. Strong results could stabilise risk appetite, while disappointment would leave equities vulnerable and potentially strengthen demand for the dollar.
USD: Fed uncertainty keeps the dollar supported
The dollar remains firm ahead of Wednesday’s Federal Reserve decision. Rising real rates continue to support the currency, despite softer inflation data and stable inflation expectations.
Markets broadly expect rates to remain at 3.50% to 3.75%, although the possibility of an immediate increase has not been fully removed. Expectations for a September move remain firmly embedded, reflecting confidence in the relative strength of the US economy.
Chair Warsh has offered limited guidance on the future path of policy, increasing the importance of the statement and press conference. A hold could disappoint more hawkish investors, while a surprise increase would challenge the broader consensus and trigger significant volatility across the dollar and short-dated US rates.
GBP: Risk aversion outweighs improving energy conditions
Sterling remains under pressure despite lower oil prices and signs of reduced geopolitical tension. These developments would normally support the pound, but weak global risk appetite and falling technology shares are limiting demand for risk-sensitive currencies.
GBP/USD is trading below its main daily moving averages, with momentum pointing towards the 1.32 area. GBP/EUR has also weakened, moving below its 21-day average and back under 1.17 after failing to hold last week’s one-year highs.
Thursday’s Bank of England meeting is the main domestic event. Rates are expected to remain unchanged, but investors will focus on whether support for tighter policy is broadening within the Monetary Policy Committee. Markets continue to price around 38 basis points of tightening by year-end, leaving sterling exposed if policymakers challenge those expectations or publish a softer inflation outlook.
EUR: Lower oil prices reduce ECB tightening expectations
Euro rates have responded quickly to the decline in crude prices. Markets have moved from fully pricing a 25 basis point ECB increase in September to assigning a probability of less than 90%.
By contrast, expectations for a September Fed increase remain more firmly established, highlighting the market’s stronger conviction in the US growth outlook. Even so, substantial near-term downside in EUR/USD appears limited.
The pair has remained largely contained between 1.1350 and 1.1450 despite recent geopolitical uncertainty. With close to two Fed increases priced for this year, any reduction in those expectations could support the euro. EUR/USD may therefore return more comfortably above 1.14 if this week’s Fed meeting provides little evidence of urgency around September.
Looking ahead
Wednesday: Federal Reserve rate decision, statement and press conference
Wednesday and Thursday: Results from Apple, Microsoft, Amazon and Meta
Thursday: Bank of England rate decision and updated economic forecasts
Oil markets: Further developments in US-Iran negotiations and supply risks
Key levels: EUR/USD at 1.1350 to 1.1450, GBP/USD towards 1.32 and GBP/EUR below 1.17