No Fed guidance dollar positive for now

USD

Chair Warsh's debut FOMC dominated yesterday and delivered the hawkish hold we had flagged in our preview. Rates were held unanimously at 3.50–3.75%, but the statement was pared back, the easing bias dropped, while Warsh abolished formal forward guidance and announced five review task forces. In the absence of an alternative steer, the dot plot was left to dictate market direction. Around half of the committee now pencils in a 2026 hike alongside a sharp upward revision to inflation. The dollar ripped, with DXY clearing 100.00 to around 100.40 and up close to 1% on the day; two-year yields jumped, equities fell, and the yen slid to its weakest since July 2024, leaving USDJPY near 160.8 with intervention chatter alive. A Presidential post casting doubt on USMCA renewal only added to the bid. Admittedly, the rush to price hikes looks premature to us, given the communications overhaul and a fast-moving Middle East, and we still lean towards no change near term. Still, with guidance gone, expect choppier, event-driven trading; focus now turns abroad to rate decisions from the SNB, Norges Bank, and BoE today, plus any further Middle East developments.

EUR

The euro could not escape the dollar's updraught late on Wednesday. Having edged back towards 1.16 on Tuesday on firmer ZEW sentiment and a softer buck, the single currency was knocked to an eight-week low by the Fed, briefly trading through 1.1500 before steadying and closing down around 0.9%. For now, with the ECB having hiked to 2.25% last week and Council members cautioning that peace will not quickly tame inflation, this is a hawkish ECB against a repricing Fed. Growth pencilled at just 0.8% caps the upside, so we look for EURUSD consolidation, with the floor of the prior 1.15–1.16 range now under pressure. The SNB and Norges Bank, both seen on hold today, and Friday's G7 round out the diary.

GBP

Sterling was the clear G10 underperformer again yesterday. May CPI undershot, seeing headline price growth remain at 2.8% year-on-year, two-tenths below consensus. That softer print, compounded by the hawkish Fed, drove cable down roughly 1%, briefly breaking below 1.33 overnight before stabilising around that level this morning. Admittedly, labour market data, published at 07:00 BST, has not proven quite as consequential, with modestly stronger-than-expected pay growth largely attributable to upgrades in prior months. We see plenty of room for the BoE to compound sterling downside at midday, however, when a rate decision is scheduled. We look for the MPC to leave Bank Rate untouched, but with potential for pushback on market rate hike expectations, leaving the MPC looking dovish beside a hiking ECB. Accompanied by cheaper Middle East energy, reinforcing disinflation and a political risk premium we think underpriced, we stay bearish on sterling near term.

CAD

The loonie buckled with the rest of the majors in the aftermath of yesterday’s Fed meeting. USDCAD, which we had flagged was probing 1.40, broke through on the Fed's hawkish turn to around 1.41, a seven-month low for the Canadian dollar, with a Presidential broadside on USMCA adding to the pressure. Oil offered no shelter: Brent slid for a fifth straight session as markets anticipate the US–Iran deal reopening the Strait of Hormuz and returning barrels to the market. That cuts both ways, easing the war premium but eroding Canada's terms of trade. With the domestic calendar bare and the next Bank of Canada meeting not until 15 July, external forces remain in charge. Near term, the path hinges on the deal and the broad dollar: a credible reopening would pull USDCAD lower, though softer oil caps loonie upside, while any unravelling before Friday's signing would revive the haven dollar. Beyond that, the 1 July USMCA review is, to our minds, the single biggest risk for the pair. We doubt the loonie recovers much before peace and trade clarity arrive.

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