Fed guidance to test uneven dollar gains

USD: Dollar divergence raises stakes for Fed guidance

The dollar’s retreat from its morning high tells the fuller story of Monday’s session. DXY reached a one-month high of 99.7 as Brent crude jumped 4.4% to $109.8 following the shutdown of Saudi Arabia’s East-West pipeline. The 10-year Treasury yield also briefly breached 5%. By late afternoon, however, DXY had fallen to 99.4 as oil retreated to $105 and the 10-year yield moved back below 5%.

Reassurances over a pipeline restart and alternative export routes eased immediate supply concerns. The reversal does not remove the energy risk, but shows that the dollar is struggling to capitalize fully on higher oil prices and yields.

That underperformance raises the stakes for Wednesday’s FOMC decision. The dollar has responded less strongly to oil and hawkish Fed pricing than it did in March, suggesting the US policy premium continues to cap its upside. Markets assign around a 90% probability to a 25bp hike and price roughly two increases across the remaining 2026 meetings.

With the decision largely discounted, attention turns to the Fed’s projections and Chair Kevin Warsh’s press conference and whatever policy signal Warsh is willing to offer. A higher 2026 median in the “dot plot” would reinforce expectations of further tightening. A cautious message could unwind recent dollar gains even if the Fed raises rates.

The decision also carries institutional risk. President Donald Trump and senior administration officials have pushed for lower rates, putting the Fed on a collision course with the White House ahead of the midterm elections. Warsh has tied his position closely to restoring price stability. Backing away from his hawkish guidance could therefore deepen questions over the Fed’s credibility and independence.

Hawkish projections could support the dollar but cap equities as higher discount rates and political criticism weigh on sentiment. A dovish message would leave markets with higher borrowing costs but less confidence that the Fed will follow through.

DXY’s failure to hold 99.7 despite strong fundamental support warrants caution. The index remains above 99.3, last week’s ceiling and the 61% retracement of the August decline. Holding that level would preserve the breakout and keep the 99.7 to 100 area in focus. The thesis would weaken if the Fed discourages further tightening, energy concerns ease or the dollar remains unresponsive to higher policy expectations.

CAD: Inflation challenges aggressive BoC pricing

In-line inflation weakened the Canadian dollar by calling aggressive Bank of Canada rate expectations into question. Headline CPI held at 3.0%, while core measures remained contained, offering little support for the nearly five rate hikes priced by next July. USD/CAD reversed from a session low of 1.3859 and extended its advance above 1.3900 as markets reassessed whether domestic inflation can justify that path.

External conditions are offering the loonie little support. Brent crude rose above $105, but the usual terms-of-trade benefit has been offset by the broader risk-off move. The US-Canada two-year yield spread also remains wide near 126 basis points, limiting the relative appeal of Canadian assets.

CAD’s failure to benefit from higher oil suggests that rate differentials and risk sentiment are carrying more weight than the energy channel. Trade tensions and recent labour-market weakness add to the pressure, leaving the hawkish policy path looking increasingly isolated ahead of the October Monetary Policy Report.

The Fed decision is now the main near-term catalyst for USD/CAD. Hawkish guidance and a higher dot plot could push the pair through its 100-day moving average at 1.393 and open a move toward 1.398. A more cautious message that limits the rise in US yields would offer CAD some relief and bring 1.383 back into focus. With Canadian inflation weakening the domestic case for tightening, the pair is increasingly exposed to the direction of US rate expectations.

MXN: Risk aversion drives Peso selloff

The Mexican peso suffered its sharpest one-day loss since June as Middle East tensions drove demand for the dollar across emerging markets. USD/MXN broke above 17 and closed at 17.13, with the latest move more closely aligned with higher oil prices and the VIX than with changes in US-Mexico rate differentials. The peso’s elevated carry remains supportive, but offered limited protection as global risk appetite deteriorated.

Higher crude prices create an additional headwind for Mexico as a net energy importer, while adding to domestic inflation pressure. Core inflation accelerated to 3.88% in August, supporting expectations that Banco de México will keep rates at 6.50% through year-end. Restrictive policy, constructive trade discussions with Washington and nearshoring investment remain supportive over the longer term, but the latest selloff shows that these buffers can be overwhelmed during a broader risk-off move. USD/MXN’s break above 17.01 shifts the near-term focus toward 17.20.

Wednesday’s Federal Reserve decision could either reinforce or interrupt that move. Hawkish guidance would support the dollar and could push USD/MXN through 17.20 and toward 17.50, particularly if risk sentiment remains weak. A more cautious message could ease pressure on emerging-market currencies and bring 17 back into focus. The near-term direction therefore depends on the combination of Fed guidance and global risk appetite, rather than carry compression alone.

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Calendar: September 14 – 18

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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.