Brent crude remains below $80 per barrel following the release of details regarding the US-Iran agreement, introducing a dovish narrative ahead of today’s FOMC decision. While we anticipate that the new Fed Chair, Kevin Warsh, will align with the market’s hawkish expectations, the risks to the dollar are skewed to the downside, as its current resilience appears heavily dependent on expectations of Fed rate hikes. Meanwhile, the Riksbank’s upcoming rate hold may carry a slightly dovish undertone.
USD: Downside Risks Present, but Warsh Expected to Deliver a Hawkish Tone
Today’s FOMC decision represents a critical test for the dollar’s recent strength. With Brent trading below $80 a barrel in the wake of yesterday’s US-Iran peace deal disclosures, the greenback is increasingly leaning on expectations of Fed tightening later this year. Consequently, the market needs confirmation that policymakers—particularly new Chair Kevin Warsh—remain genuinely open to rate hikes, even though a hold is virtually guaranteed for today’s meeting.
Should Warsh or the broader FOMC signal a stance that significantly diverges from current market pricing, we expect a sharp sell-off in the dollar. However, as outlined in our Fed preview, the removal of the easing bias from the policy statement and a downward adjustment in the median 2026 dot plot could be sufficient to keep the dollar supported. This remains our baseline scenario: the Fed validates market expectations, resulting in a broadly neutral impact on the USD.
Nevertheless, we acknowledge that the balance of risks has tilted to the downside for the dollar following the US-Iran agreement. Softer energy prices bolster the case for a dovish repricing, while the swap curve has thus far remained largely unresponsive to the improved Middle East sentiment, still pricing in 21 basis points of tightening by December.
Ultimately, the primary dovish catalyst may stem from Warsh’s communication rather than the official statement itself. While he likely has little incentive to intentionally deliver a dovish surprise and disrupt the bond market at his inaugural meeting, traders may overanalyze any subtle nuances in his remarks as an indication of a future dovish pivot.
EUR: Targeting Stabilization
EUR/USD reclaimed the 1.1600 level yesterday but is clearly pausing for direction from the Federal Reserve. As noted, our baseline outlook is neutral for both the dollar and the EUR/USD pair today.
However, the inclusion of financial incentives for Iran in the peace deal—such as the resumption of oil exports, economic development funds, and the unfreezing of assets—makes the recent drop in oil prices appear more sustainable. This, in turn, mitigates the downside risks for EUR/USD in the near term. We anticipate consolidation in the 1.1600–1.1650 range for the time being.
Another cross we are closely monitoring this week is EUR/GBP, which has traded slightly firmer this morning after May’s UK inflation data came in marginally below expectations. The headline CPI remained unchanged at 2.8% (versus a 3.0% consensus), primarily driven by subdued food inflation, while the core reading edged up slightly to 2.6% (consensus 2.7%). Services CPI, however, was slightly hotter than anticipated at 3.7%. These figures do not alter our forecast of a 7-2 vote in favor of a hold by the Bank of England tomorrow.
Nevertheless, upside risks persist for EUR/GBP, as the 30 basis points of BoE tightening currently priced into the curve appear overly hawkish. Additionally, a political risk premium could resurface following tomorrow’s by-election, which is expected to set the stage for Andy Burnham to replace Keir Starmer as Prime Minister.
