The US dollar is holding firm, underpinned by geopolitical tensions and growing expectations of further monetary policy tightening by the Federal Reserve. While the futures market has already priced out a June fed funds rate hike, the probability of further tightening over the course of 2026 remains high at 81%. Rising oil prices are only bolstering the greenback, paving the way for more aggressive action from the US central bank.
Brent crude has climbed above the psychological threshold of $90 a barrel for the first time since early June. Fundamental factors—such as slowing global demand, particularly from China, releases from strategic reserves, and alternative supply routes—are capping further rallies in crude oil. However, the refined products market lacks such “shock absorbers.” Even if Brent corrects, gasoline and diesel prices are unlikely to fall significantly. This ensures that inflationary pressure in the US will persist, forcing the Fed to maintain its hawkish stance.
Despite the dollar’s long-term structural advantages, its rivals stand to capitalize on expectations of further monetary tightening. The euro, traditionally vulnerable due to energy dependency, could go on the offensive driven by hawkish signals from the ECB. While no rate hike is expected in July, any hints from Christine Lagarde regarding a September hike could serve as a catalyst for a rally in EUR/USD.
While the euro takes its cues from ECB rhetoric, the pound sterling will be driven by a packed macroeconomic calendar. Investors are bracing for a slew of UK data releases covering the labor market, inflation, and retail sales. A slowdown and stabilization in these metrics are expected, which could lower the odds of further Bank of England tightening and trigger profit-taking on long GBP/USD positions. Conversely, any upside surprises in the data would quickly draw buyers back to the British currency.
The Japanese yen remains under pressure. Prime Minister Sanae Takaichi’s calls to encourage pension funds, including the GPIF, to invest in domestic assets have yet to reverse the trend. Low volatility and a strong appetite for risk continue to fuel the popularity of carry trade strategies, where the yen traditionally serves as the funding currency.
