USD: Energy shock puts Fed guidance at center of Dollar outlook
The dollar’s reversal from its morning highs tells the fuller story of Monday’s session. DXY reached a one-month high of 99.73 as Brent crude jumped 4.4% to $109.8 following the shutdown of Saudi Arabia’s East-West pipeline, while the 10-year Treasury yield briefly breached 5%. By late afternoon, DXY had fallen to 99.4 as oil retreated to $105 and the 10-year yield slipped below 5%. Reassurances over the pipeline restart and alternative export routes eased immediate supply concerns. The reversal does not remove the energy risk, but it shows that the dollar is struggling to capitalize fully on higher oil prices and yields.
Understanding the underperformance is key ahead of 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 a 90% probability to a 25bp hike and price roughly two increases across the remaining 2026 meetings. With the immediate decision largely discounted, the focus shifts to the Fed’s projections and Chair Kevin Warsh’s press conference. A higher 2026 median in the dot plot would reinforce expectations of further tightening and provide the dollar with policy support it has yet to fully reflect. A cautious message could unwind recent gains even if the Fed raises rates.
The Fed’s communication also carries an institutional risk. President Donald Trump and senior administration officials have pushed for lower rates, putting the central bank on a collision course with the White House ahead of the midterm elections. Warsh has tied his position closely to restoring price stability, so backing away from recent hawkish guidance could deepen questions over the Fed’s credibility and independence. A hike accompanied by hawkish projections could support the dollar, but cap equities as higher discount rates and political criticism weigh on sentiment. A dovish message would be less constructive for the dollar, leaving markets with higher borrowing costs but little confidence that the Fed will follow through.
DXY’s failure to hold 99.7 despite strong fundamental support warrants caution, although 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 broader thesis would weaken if the Fed discourages expectations of further tightening, energy concerns ease or the dollar remains unresponsive to higher policy expectations. For equities, the midweek risk is a Fed firm enough to sustain the dollar’s rate support but offering little relief from higher borrowing costs, political pressure and energy-driven inflation.
EUR: Caught between geopolitics and a Fed hike
Market moves were telling last night. The bond market sold off in a disorderly fashion through most of the London session, particularly at the short end of the curve. A jump in oil prices was the main catalyst. Brent crude then appeared to exhaust its upside near $110 a barrel, giving back most of the day’s gains.
Bond market moves subsequently became more orderly, with the long end of the curve, particularly the 30-year yield, posting a positive session. It was also telling to see market pricing for a Fed hike this week steadily rise to as much as 93%, from around 86% earlier in the session. A Fed hike is being viewed as somewhat restorative amid persistent inflation uncertainty. In that context, a flattening yield curve appears to be the market’s preferred response.
Against this backdrop, EUR/USD initially sold off aggressively, falling back towards the early August lows near 1.1520, before recovering into the more familiar 1.1550-1.1570 range.
In our view, EUR/USD has been more responsive to deteriorating risk sentiment in recent days than to the consolidation of Fed hawkish expectations. Either way, the euro appears likely to remain under pressure in the near term.
Unless major geopolitical developments intervene, EUR/USD appears poised for a test of 1.15 this week. Whether a Fed hike adds to the downside depends not on the decision itself, which is largely priced in, but on how markets interpret Chairman Warsh’s messaging beyond it.
GBP: Global risk hits cable, rates keep rising
Sterling came under pressure against the dollar on Monday, with GBP/USD falling to a one-month low as the global bond sell-off gathered pace and weaker equities weighed on the risk-sensitive pound. Yet the move remains concentrated in cable, with sterling firmer elsewhere across the G10. GBP/CHF has reached a fresh one-year high, while GBP/EUR is edging back towards 1.17.
Technically, GBP/USD is approaching an important cluster of daily moving averages in the low-1.34s. A decisive break below this support zone would weaken the setup and bring the 100-week moving average near 1.32 back into focus, a level cable has repeatedly gravitated towards over the past year.
Domestic data offered little direction. Wage growth slowed to 3.9%, unemployment held at 4.9%, while payrolls fell for a seventh consecutive month and vacancies dropped to a five-year low. The picture remains consistent with a “low hire, low fire” labour market, reducing the risk of stronger second-round wage pressures.
However, oil above $109/bbl is complicating the rates outlook, with markets now pricing as many as five BoE hikes by end-2027. That looks increasingly aggressive against a backdrop of cooling employment and wage pressures. For sterling, the bigger risk is therefore a dovish recalibration: if the BoE pushes back against market pricing or growth weakens further, an unwind of hike expectations could erode the pound’s yield advantage and weigh on GBP.
Market snapshot
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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.
