Dollar gains ahead of this afternoon’s Fed decision
The dollar regained ground on Tuesday after retreating to start the week, with the DXY supported by better‑than‑expected US consumer confidence and a risk‑off tone as hopes for a rapid end to hostilities between the US and Iran faded. Looking ahead, we expect today’s FOMC meeting to see rates held a
USD
The dollar regained ground on Tuesday after retreating to start the week, with the DXY supported by better‑than‑expected US consumer confidence and a risk‑off tone as hopes for a rapid end to hostilities between the US and Iran faded. Looking ahead, we expect today’s FOMC meeting to see rates held at 3.50–3.75%, but guidance will be key. Our week‑ahead preview argued that policymakers would emphasise optionality while acknowledging that the energy‑driven inflation shock complicates the disinflation narrative. With core CPI running above target and the labour market showing signs of softening, we think the Fed will stress patience in what is likely to be Chair Powell’s last meeting, keeping rate differentials supportive for the greenback. Ongoing Middle Eastern hostilities should also maintain a safe‑haven bid, barring any surprises.
EUR
The euro drifted lower on Tuesday as the dollar recovered, and traders positioned for this evening’s Fed and Thursday’s ECB meetings. Admittedly, euro gains earlier in the week had owed more to dollar weakness than any euro‑specific optimism, and with valuations looking a little toppy against the present risk backdrop, yesterday’s pullback was hardly surprising. In terms of more forward-looking catalysts, today’s calendar includes preliminary Spanish and German CPI prints in addition to this evening’s Fed meeting, while markets will also be focused on tomorrow’s ECB decision. We think policymakers will leave the deposit rate at 2.00% and push back against market expectations for further hikes, given that growth indicators have slipped into contraction and inflation remains near target. Unless there is a decisive de‑escalation in the Middle East or a notable decline in US yields, we expect EURUSD rallies to remain short‑lived.
GBP
Sterling reversed much of Monday’s advance, slipping back towards the mid‑1.34s as the dollar firmed and risk appetite waned. On that score, domestic political risks also played a role too, albeit with PM Starmer ultimately escaping referral to the Privileges Committee in a vote yesterday, sterling rebounded into the back end of the session. Still, with today’s Fed decision and Thursday’s Bank of England meeting still ahead, we think it remains too early to turn bullish on the pound. We have previously argued that markets are overpricing the risk of further BoE hikes; with private‑sector wage growth moderating and the labour market softening, we expect the MPC to hold Bank Rate at 3.75% and emphasise that the current energy shock is likely to prove transitory, even if Governor Bailey avoids that precise wording. Until then, sterling is likely to take its cues from geopolitical headlines and global risk sentiment, which should help maintain downside pressure.
CAD
The Canadian dollar underperformed on Tuesday, with USDCAD bouncing back toward 1.37 as the greenback strengthened, and a deterioration in risk sentiment offset another rise in oil. Attention now turns to today’s Bank of Canada decision. We expect rates to remain at 2.25% and for Governor Macklem to tilt guidance modestly dovish: our week‑ahead preview noted that the BoC considered cutting rates in March were it not for the energy shock, highlighting soft labour‑market data and cooling core inflation. With domestic economic activity still sluggish and inflation measures ex‑energy running below 2%, a dovish tone could limit further loonie strength, especially if contrasted with a steady‑as‑she‑goes Fed later in the day. Absent a breakthrough in Middle Eastern hostilities, we expect USDCAD to remain range‑bound with a slight upside bias.