Dollar Dilemma: Resilience Amid Risk.
USD remains supported by geopolitical risk and limited foreign Treasury selling; dot plot rate cuts are being discounted.
EUR/USD likely to drop toward 1.140 on geopolitical tension; SNB and Norges Bank policy moves may bring limited EUR volatility.
CHF gains may be short-lived as the SNB eyes negative rates despite a likely 25bp cut today.
GBP pressured by dovish BoE signals and weak wage/service inflation data; Bailey’s comments will guide future expectations.
Geopolitics dominate near-term FX direction, with potential US action in Iran and high oil prices lifting the dollar’s appeal.
USD: Resilient Despite Rate Cut Projections
Yesterday’s twin macro events—the FOMC meeting and April’s TIC data—caused barely a ripple in FX markets. As covered in our Fed review, traders are downplaying the dot plot rate forecasts, rightly cautious given the fog surrounding tariff effects and oil price volatility. While the Fed kept two cuts in its 2025 median outlook, its tone was less anxious about growth and jobs.
Meanwhile, TIC data revealed only a modest $36bn drop in foreign Treasury holdings out of a $9tn total—suggesting domestic players, not foreigners, drove recent selling. This weakens the “sell America” narrative. Though de-dollarisation chatter continues, more data is needed before jumping to conclusions. For now, the USD avoided a major setback.
But the bigger mover near term is geopolitics. Reports point to potential direct US military action against Iran—possibly within days. While earlier USD strength was driven by concerns over US policy missteps, the current premium seems more defensible given energy-driven geopolitical risk. That keeps the dollar in favour compared to energy-reliant havens like the euro.
EUR: Big Day for Central Banks, Little Room to Rally
EUR/USD remains on shaky ground as geopolitical tensions buoy the USD. We see room for further EUR/USD downside—perhaps to 1.140—even without another oil spike. Still, unless geopolitics trigger lasting commodity shifts, the euro may find buyers on dips once risks ease.
The eurozone itself is quiet today, but central banks across Europe are active. We expect the Swiss National Bank to cut rates by 25bps to 0% and hint at another cut, though initial CHF strength may fade as expectations shift towards negative rates.
In Norway, Norges Bank is likely to hold steady, though we’ve warned delaying cuts carries risks. Surging oil prices could delay any move until September, already fully priced in. We expect EUR/NOK to stay range-bound with a hawkish slant.
The Bank of England also meets today. No move is expected, but soft UK data and likely dissent from dovish MPC members may tilt the risks towards a more dovish message. We remain short-term bullish on EUR/GBP.
GBP: BoE Doves Stir Caution
The pound is under pressure ahead of the BoE decision, slipping against most majors except the Aussie and Kiwi dollars. The central bank is expected to hold rates at 4.25% with a 7-2 vote, with Dhingra and Taylor again backing a cut, just as they did with a bold 50bps call in May.
Governor Andrew Bailey has so far signalled a slow-and-steady easing path, saying inflation risks have cooled. But with UK wage growth softening and services inflation dropping to 4.7% from 5.4%, markets are watching closely for signs the BoE may lean more dovishly.
Post-decision, Bailey’s press conference will be key—especially his take on Middle East-driven energy risks and how they might shape the inflation and policy outlook in the months ahead.