USD

Wednesday saw the US dollar extending its recent gains, helped by a widely expected hold in interest rates from the Fed. The FOMC left its policy rate unchanged at 3.50–3.75%, acknowledging two-sided risks to the outlook. Critically, Chair Powell struck a slightly hawkish tone in his post-meeting comments, highlighting uncertainties around the inflationary impact of the Middle East conflict, which pushed the dollar higher late in the day. The DXY index climbed back above the 100 level, where it remains this morning, as investors pared back bets on Fed rate cuts later this year. Classic safe-haven demand tied to the ongoing hostilities in the Middle East has also helped to underpin the buck, with attacks on gas infrastructure in the region and rumours of a possible US energy export ban, triggering renewed consternation across markets. For the day ahead, a series of central bank decisions will keep traders busy. However, unless a clear de-escalation in Middle East tensions materialises, we expect the dollar to remain supported in the near term, especially if risk sentiment stays fragile.

EUR

EURUSD slipped toward the mid-1.14 range following yesterday’s hawkishness at the Fed and rising energy concerns, underscoring the euro’s vulnerability to a resurgent dollar, and to the ongoing Middle East tensions. Looking ahead, today’s European Central Bank meeting will be critical. We expect the ECB to keep rates on hold at 2.00%, as we noted in our week-ahead report, albeit with guidance acknowledging the inflationary impact of elevated oil costs due to Middle Eastern hostilities. President Lagarde is likely to stress the Bank’s readiness to act if needed, but also caution that energy-driven price spikes may be temporary, and that economic growth is slowing. The net effect should be relatively balanced rhetoric that leaves EURUSD direction driven more by global sentiment, the dollar’s trajectory, and any further geopolitical developments.

GBP

The pound remains off last week’s highs against the greenback, sinking lower again overnight as traders digested the latest news from the Fed. That leaves cable trading in the 1.32s this morning as risk appetite continues to be dampened by war-related uncertainty. Still, sterling has held onto most of its recent gains against the euro since the onset of the Middle East conflict, reflecting how higher energy prices pushed back expectations for BoE rate cuts. The focus now turns squarely to the Bank of England’s policy decision at midday. We anticipate that the MPC will keep Bank Rate at 3.75%, as signalled in our earlier reports, reversing our previous expectation of a cut due to the oil-driven inflation shock. But with UK growth stagnant and wage pressures easing, policymakers have reason to remain cautious. Governor Bailey is likely to acknowledge the upside risks to inflation from elevated oil prices amid the Middle East turmoil, tempered with a continued bias towards future easing. Such cautious guidance would likely weigh on the pound, particularly against the euro.

CAD

As we had expected, the Bank of Canada confirmed a hold in rates yesterday, signalling a more dovish stance than markets anticipated. The BoC left its overnight rate at 2.25%, matching our forecasts, and emphasised a “wait-and-see” approach in light of conflicting forces: domestic economic softness versus rising inflationary risks from the Middle East conflict. Governor Macklem’s comments, including an observation that, if not for geopolitical events, the Bank would be contemplating rate cuts, pushed back against recent market bets on future hikes. The immediate reaction saw USDCAD rise toward the upper end of its recent range near 1.38, though the oil-linked loonie has been partly cushioned by crude prices holding above $100 per barrel. In the day ahead, no major Canadian data releases are scheduled, meaning external factors will drive CAD. Ongoing Middle East hostilities are keeping global risk appetite in check even as they support oil prices, leaving the loonie caught between opposing forces. Absent a meaningful de-escalation in geopolitical tensions, we expect CAD to trade near current levels for now.

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